BSP says assessing banks' ability to absorb rate hikes

Reuters

Posted at May 23 2014 04:52 PM | Updated as of May 24 2014 12:52 AM

MANILA - The Philippine central bank is monitoring banks' property and bond portfolios to determine possible pressure points in the financial system arising from an eventual rate hike as monetary policy normalizes, its governor said on Friday.

The central bank has launched a stress test for lenders targeted to assess the impact of interest rate changes on banks' balance sheets.

Analysts expect the Bangko Sentral ng Pilipinas (BSP) will raise the policy rate from a record low of 3.5 percent sometime in the second half of the year.

"It's more gradual, there is time to adjust, it will be more difficult if it is abrupt - that's for interest rates in general because of the normalisation," Amando Tetangco, BSP governor, told Reuters on the sidelines of the World Economic Forum on East Asia.

"When interest rates increase, there could be some problems if banks have a large property portfolio. If interest rates increase, there could be some pressure."

"Even the impact of normalisation on bond portfolio of banks, we're also looking at that, that's part of our study," Tetangco said.

The BSP is giving banks enough time to assess how possible interest rate hikes could impact their balance sheets, Tetangco said, part of a larger goal of preventing asset bubbles from forming in the property market and the build-up of inflationary pressures. But he declined to say how long the central bank will wait for the banks' reports.

"If the impact will be big, then they may have to come up with a plan on how to address the potential impact from increasing interest rates," Tetangco said.

The BSP kept its policy rate steady at its last meeting earlier this month but raised banks' reserve requirements for a second time in as many meetings on concerns that persistently high liquidity could stoke inflation.

The central bank has said inflation remained largely manageable and is likely to remain within the target range of 3 to 5 percent this year, but the leeway to keep rates steady has narrowed with average inflation settling above the midpoint of the target range so far this year.

Inflation for both April and the first four months of the year was 4.1 percent. The central bank said earlier this month it expects average inflation this year to hit 4.3 percent, higher than a previous forecast of 4.2 percent.