BSP widely expected to maintain policy rates

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely keep borrowing rates steady this week, analysts said in a BusinessWorld poll, with latest inflation figures seen not a concern for new Governor Nestor A. Espenilla, Jr. and giving more room to delay policy tweaks for now.

Nine economists asked late last week said the central bank will likely hold fire on monetary policy on Thursday as the central bank holds its fifth rate-setting meeting this year, which is the first Mr. Espenilla will preside over after assuming the BSP’s top post last month.

His predecessor, Amando M. Tetangco, Jr., opted to keep monetary policy stance unchanged for 22 straight meetings since a rate hike in September 2014. Procedural cuts — which saw the main policy rate cut to three percent from four percent previously — were introduced in June last year to usher in an interest rate corridor scheme designed to better siphon excess liquidity and influence market rates besides. Benchmark rates are now 2.5-3.5%.

“For as long as prices and other economic indicators remain stable, rates will be kept at current level. However, if the peso will continue to depreciate against the dollar, this might affect prices of basic commodities and even cost of imports,” said Mitzie Irene P. Conchada, vice-dean at the De La Salle University School of Economics.

Inflation settled at 2.8% in July, slightly higher than the preceding month’s downward-revised 2.7% but still well within the central bank’s 2-4% target band. Price increases averaged 3.1% for the first seven months, matching the BSP’s estimate for the entire year.

The peso touched 11-year lows last month to as weak as P50.94 on July 19, but has settled back to P50.16 versus the dollar last Friday. Central bank officials have said that they prefer a market-determined exchange rate, but admitted that they intervene in daily trading to temper “excessive” currency swings.

Rajiv Biswas, Asia-Pacific chief economist at IHS Markit, also said that the BSP will not have to tweak interest rates given muted price conditions, with little pressure coming from the Federal Reserve. “While the US Fed is expected to hike policy rates once more in late 2017, the BSP’s own monetary policy decisions during coming months will focus on trends in domestic inflation, the pace of credit expansion and GDP ( gross domestic product) growth momentum in the Philippines, rather than US Fed policy moves,” Mr. Biswas said.

Mr. Espenilla, who took the helm of the BSP on July 3, has said that Philippine monetary authorities will not have to match the Fed’s hike automatically, given that inflation remains their biggest consideration.

Emmanuel J. Lopez, chair of the University of Santo Tomas Department of Economics, noted that stable inflation and rosy growth prospects should allow the BSP to stand pat on current policy settings, adding that it was to be expected from a new central bank chief.

“I don’t expect the new governor to make major decisions, considering that the most probable thing that a newcomer should do is to adopt a wait-and-see attitude,” Mr. Lopez said, while noting that the BSP may consider hiking by December should inflation pick up.

“I think BSP Governor Espenilla is more a dove than a hawk, as there are no major hints from him in the past months about the need to hike interest rates in the near term,” noted Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines.

“However, this evidence does not conclusively make him a dove, as current economic conditions really do not warrant an urgent adjustment in policy settings.”

Some analysts said there could be a slim chance of the BSP raising rates next quarter, but more were of the view that a hike would not be on the table until early 2018.

“The earliest possible time for the central bank to raise rates might be in the first quarter next year, assuming the first tax reform package is implemented by then since this policy

measure will push inflation upward,” said Security Bank Corp. economist Angelo B. Taningco, referring to the government’s plan to raise by January next year taxes on fuel, cars and sugarsweetened drinks.

One economist noted that the BSP might choose to adjust the reserve requirement ratio (RRR) imposed on big banks before touching the benchmark rates.

“I will be watching closely the RRR for, which I think the probability of a cut this year may be rising,” Nomura economist Euben Paracuelles said.

“With inflation now below the midpoint of BSP’s target, Governor Espenilla might have just found a window to deliver on BSP’s long- term goal to reduce RRR, which is currently the highest in the region at 20%.”

Mr. Espenilla has said the BSP is looking for an appropriate time for the RRR cut, noting that it has caused “inefficiency” in the financial system. At the same time, the move will likely affect current liquidity conditions as it would unlock more funds held by banks.