BSP seen keeping rates steady for third time

By Karen Lema, Reuters

Posted at Jul 20 2012 05:12 PM | Updated as of Jul 21 2012 01:12 AM

MANILA - The Philippine central bank is expected to keep its key policy rate on hold for a third meeting in a row, with the economy seen steaming ahead on the back of strong domestic demand while  inflation stays on target this year and next.

Eleven of 12 economists polled by Reuters see the Bangko Sentral ng Pilipinas leaving the overnight borrowing rate unchanged at a record low of 4 percent next  Thursday. One economist penciled in a 25 basis point rate cut.

While the central bank had said it has room to loosen monetary policy given moderating inflation, analysts believe any further easing will come only if risks to the Philippine economy rise sharply and threaten this year's growth targets.

The Philippine economy expanded briskly at a 6.4 percent annual pace in the first quarter, its fastest in a year-and-a-half, fuelled by strong consumption and state spending, and President Benigno Aquino told Reuters this month growth will accelerate further in the second quarter.

Annual inflation slowed in June, keeping the six-month average inflation rate at 3 percent, matching the low end of the central bank's 3 to 5 inflation target for the year.    

The World Bank and the International Monetary Fund had raised their growth forecasts for the Philippines following the country's stellar performance in the first three months of the year, but they warned Manila faces global headwinds in the coming quarters.

"With real rates in positive, the central bank has the required headroom to shift to an accommodative policy stance, if required. However, we do not see the need for the latter until end-year, barring unexpected flare-ups in the external environment," said Radhika Rao, economist at Forecast, in Singapore.

Rao also said the central bank will likely resort to non-rate tools to manage capital flows, which have become a source of concern for authorities because they complicate monetary policy. 

Sluggish growth in major economies has prompted investors to shift funds to faster growing emerging market economies such as the Philippines, to provide better returns.

Governor Amando Tetangco said on Wednesday strong capital flows were a near-term concern, although the country has sufficient tools to manage the impact of fund movements.

To discourage speculative activities in the foreign exchange market, the central bank tightened the rules on its short-term special deposit account (SDA) window earlier this month to keep foreign funds out of the facility, and on July 13, it lowered the SDA rates. 
The SDA window, introduced by the central bank in 1998 to help manage liquidity in the financial system, has attracted funds amounting to as much as P1.7 trillion ($40 billion) as it offers higher rates than comparable Treasury bills.