BSP seen to finally raise rates next year

Nomura Securities Co. Ltd. sees the policy stance of the Bangko Sentral ng Pilipinas (BSP) turning hawkish in the first half of next year amid rising inflation.

In a special report titled “Philippines: Beyond words,” Nomura said the BSP is likely to hike key policy rates by 50 basis points in the first semester after holding rates this year.

It pointed out the Philippines is the only central bank in Asia that would likely tweak interest rates next year.

Nomura explained BSP remains firmly an inflation targeting central bank and places a lot of emphasis on preserving its inflation-fighting credentials relative to other regional central banks with the same mandate.

“Therefore, we continue to believe the monetary policy stance is set to tighten, given our view of rising inflation risks over the next 12 months,” it said.

The country’s inflation kicked up to 2.3 percent in September from 1.8 percent in August due to faster rise in food and non-food prices. This brought the average inflation to 1.6 percent in the first nine months of the year.

Nomura sees inflation averaging 1.7 percent this year and 3.3 percent next year. The BSP’s inflation target is pegged at two to four percent between 2016 and 2018.

“BSP is also unlikely to remain comfortable with the risk of higher imported inflation, given the recent weakness of the currency and the quick pass- through from international oil prices,” it said.

In local currency terms, crude oil prices are now up 7.9 percent year-on-year versus a 19.6 percent decline at the end of first half.

The BSP last tweaked its policy stance in September 2014 when it raised interest rates by 25 basis points.

Last June 3, the BSP implemented an operational adjustment reducing the overnight lending rate (formerly overnight borrowing rate) to 3.5 percent from six percent as well as the overnight reverse repurchase rate ( formerly overnight lending rate) to three percent from four percent as part of the shift to the interest rate corridor (IRC) system.

The yield of the overnight deposit facility ( ODF) was retained at 2.5 percent. The interest rates for the standing liquidity facilities form the upper and lower bound of the corridor while the overnight reverse repurchase is set at the middle of the corridor.

It also launched the term deposit facility (TDF) last June 8 wherein P30 billion worth of seven- and 28- day term deposits were auctioned to banks and trust entities every Wednesday.

The volume has since been increased five times bringing the size to P130 billion starting Nov. 2.

“As we anticipated, BSP has been gradually offsetting the de facto easing by increasing the auction sizes of its new TDF to absorb excess liquidity, particularly since September,” Nomura said.

Last Wednesday, the sevenday term deposits fetched 2.502 percent from last week’s 2.5 percent while the yield on the longer 28-day term deposits increased to 2.5615 percent from 2.5584 percent.

“Ultimately, we see the endgame as a migration of excess liquidity from ODF into the TDF, with the TDF eventually becoming the actively managed primary liquidity absorption tool, which would further enhance BSP’s ability to anchor money market rates to the policy rate,” it said.