BSP rate hike seen in September

American investment bank BofA Merrill Lynch sees the Bangko Sentral ng Pilipinas keeping its key interest rates steady during its next policy rate setting this month but resuming its tightening cycle with a 25-basis point increase in September.

In its monthly report on emerging markets dated June 30, BofA Merrill Lynch said the BSP’s move to increase the reserve requirement by one percentage point to 20 percent last June 24 appeared to be a “compromise” given that the policy rates have been raised by 50 basis points so far this year alongside signs that economic growth was slowing.

“While inflation is still forecast to rise toward 6 percent, possibly by September-October, the reserve requirement hike may give the Philippine central bank more time to contemplate whether more severe tightening is needed,” the research paper stated.

BofA Merrill Lynch sees inflation in the Philippines averaging 4.5 percent this year and 5 percent in 2012. Gross domestic product was seen growing 5.8 percent in 2011 and 5.9 percent next year.

At this stage, the research said the main risk for the Philippines might be that government underspending paired with monetary tightening would combine to soften economic growth substantially.

It noted that underspending by government was already partly responsible for GDP growth slowing to 4.9 percent in the first quarter, albeit this had resulted in a far better fiscal position.

“If anything, loan growth accelerating to 14 percent through April suggested that monetary policy has not crimped credit growth as yet,” the research said.—Doris C. Dumlao