BSP to hold fire on Thursday, but rates may rise soon

Reuters

Posted at Jun 18 2014 04:11 PM | Updated as of Jun 19 2014 12:11 AM

MANILA - The Philippine central bank will likely keep rates unchanged at its policy meeting on Thursday after growth unexpectedly slowed in the first quarter, a Reuters poll showed, but quickening inflation may lead to a rate increase as early as next month.

Central bank Governor Amando Tetangco said on Wednesday that inflation for this year and next would likely average above previous forecasts due to price pressures coming from costlier power, food and transport costs.

"We would like to see the extent of brewing pressures that we have seen lately on inflation and assess the potential second round effects that can come out from these pressures," Tetangco told reporters ahead of a policy review on Thursday.

"Given the pressures, I would think that there will be an upward adjustment in the inflation forecasts," Tetangco said.

At its last policy meeting in May, the central bank forecast average inflation at 4.3 percent this year and 3.4 percent for 2015. Both remain within the central bank's current target ranges.

Tetangco said the Monetary Board would also review the impact of a total two-percentage-point increase in banks' reserve requirements, the Federal Reserve's taper of its bond-buying programme, slowing Chinese economy and geopolitical developments in Iraq on domestic inflation and financial markets.

Nine of 12 analysts surveyed by Reuters expected the central bank to keep the benchmark rate at a record low of 3.5 percent. Three said it would raise the policy rate, which would be the first hike in three years.

The Bangko Sentral ng Pilipinas (BSP) is also widely expected to keep the special deposit account rate at 2.0 percent and leave the reserve requirement ratio (RRR) unchanged at 20 percent after raising it by a total of two percentage points in each of the last two meetings.

The Southeast Asian economy's weaker-than-expected annual growth of 5.7 percent in the first quarter may have bolstered the case for interest rates to be kept steady on Thursday. But analysts said it may only be a matter of time before the central bank pulls the trigger on rates to fight inflation.

After hitting a two-and-a-half year high of 4.5 percent in May, annual inflation is expected to accelerate further in the coming months due to rising food and transport costs, some analysts said.

That raises risks of inflation exceeding the central bank's target of 3-5 percent this year and 2-4 percent next year.

"We expect inflation to approach the 5 percent upper boundary of the target in the next few months, and even breach next year's 2 to 4 percent target range...driven by a host of supply- and demand-side factors, the latest of which is the risk from weather-related inflation pressure," Euben Paracuelles, economist at Nomura in Singapore, said in a research note.

"We continue to see BSP delivering its first policy rate hike at the July 31 meeting. We acknowledge, however, the potential for delays, as BSP could take time to assess the inflation outlook," Paracuelles said.

Tetangco had said authorities were ready to tweak policy if price pressures continue to mount and put this year's 3-5 percent inflation target at risk, as the room to keep the interest rate steady has narrowed.

The overnight borrowing rate was last changed in October, when it was cut by 25 basis points to a record low of 3.5 percent, while the SDA rate was last adjusted in April 2013 when it was reduced by half a percentage point to 2.0 percent.