Economists say levels enough to support growth
By Doris C. Dumlao
Philippine Daily Inquirer
7:12 pm | Sunday, July 28th, 2013
The Bangko Sentral ng Pilipinas is seen to keep its key interest rates unchanged for the rest of the year as current settings are enough to support growth and at the same time guard against external head winds.
In separate research notes issued after the BSP’s latest monetary review, economists from Citigroup and HSBC projected that the overnight borrowing rate would be kept at 3.5 percent and the special deposit account at 2 percent for the remaining months of 2013.
Citi Philippines economist Jun Trinidad said last week’s decision of the BSP to keep policy rates unchanged amid upward revisions to inflation forecast this year to 3.3 percent from 3.1 percent suggested “no tilt toward policy rate accommodation for the remainder of the year.”
“The revised inflation trajectory remains well within the BSP’s annual inflation forecast range of 3-5 percent in 2013-14 (revised to 2-4 percent in 2015), though it likely won’t be as benign as previously anticipated,” Trinidad said.
The research took note of the assessment of the BSP’s policy-making Monetary Board (MB) that domestic demand remained favorable alongside upbeat confidence, strong liquidity and bank lending supporting favorable growth prospects. “We take this as the MB suggesting that the domestic economy does not need further monetary accommodation with existing settings appropriate despite external trade head winds and financial market volatility arising from ‘risk of tapering monetary stimulus in advanced countries,’” Trinidad said.
As to whether a weak peso was an inflation risk, Trinidad said unless it was a massive currency devaluation arising from a significant current account deterioration—which was not the prevailing case—and without a higher oil price outlook, the ensuing imported inflation risk would not be a major price trigger.
HSBC economist Trinh Nguyen said that for the year, average Philippine headline inflation would likely settle at the bottom of the target at around 3.1 percent.
“With inflationary pressures still benign, albeit rising, the central bank could afford to hold rates steady to accommodate growth as comments from various monetary officials suggest that the BSP is not concerned with a potential asset bubble, although it is monitoring price behaviors, especially the real estate sector,” Nguyen said.
The gradual decline of the amount parked in the BSP’s high-yield special deposit account (SDA) facility since February suggested that funds were beginning to flow out of the facility and the rate of outflow was expected to accelerate in the coming months, she said.
The BSP banned nonpooled trust accounts from the SDA facility by January 2014. Nguyen said the effects of this policy adjustment, including the slashing of the SDA rate from 3.5 percent to 2 percent, were gradually being felt, with the amount in the facility declining from a peak of P1.9 trillion in February to P1.7 trillion in June. “We expect at least half of the total amount to liquidate the facility by end-November 2013,” she said.
For now, especially with volatility in asset markets due to uncertainty about whether the US Federal Reserve will gradually remove quantitative easing in September and China’s slowdown, Nguyen said the SDA rate was expected to stay on hold at 2 percent.
“Any significant movement in the future is contingent on the central bank’s ability to see through the fog, which is unlikely to take place at the next meeting or even the Sept. 12 meeting,” she said.
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