Pause in BSP rate cuts to keep bond yields low

MANILA, Philippines—Bond yields will stay low as no more policy rate cuts are expected for the rest of the year, particularly because inflation is forecast to rise, albeit slightly.

DBS Group said in a research note that, following the decision last week of the Bangko Sentral ng Pilipinas to keep key rates unchanged, it appears that the overnight borrowing and lending rates have reached their “lowest for this easing cycle” at 4 percent and 6 percent, respectively.

“Current policy rates already reflect the central bank’s view that [year-on-year] inflation will be 3.1 percent this year, which is at the bottom of its 3-5 percent target range,” the financial service provider said.

“Further rate cuts would be likely only should inflation show signs of averaging less than 3 percent this year and next,” it added.

The Singapore-based group said that while the latest inflation figure is set at 2.6 percent year on-year as of March, the full-year average is not likely to fall below 3 percent.

DBS maintains its forecast that consumer prices will rise at an average of 4 percent in 2012.

“For bonds, a prospective flat trajectory for policy rates is good news,” the group said. “Policy rates are low and likely to stay low in the coming months, which should mean that bond yields too can stay low.”

DBS observed that liquidity conditions “have tightened somewhat” since September as shown with the upward pressure on interbank rates.

Even then, DBS believes that overall liquidity should remain good enough to allow government bond yields to stay low.

“We maintain the view that market interest rates on average are likely to be lower in 2012 than they were in 2011,” the group said.

DBS noted that yield on 10-year bonds, which averaged at 6.46 percent in 2011 and are currently at 5.83 percent, is not likely to reach an average of 6 percent this year.