MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) is still likely to keep key rates steady during its policy meeting this month despite inflation creeping up to the three to five percent target range.
In a research note, Singapore-based DBS Bank, however, said it expects a 50-basis point increase in key policy rates that will transpire in the second half of the year.
“Following the adjustment done to the reserve requirement rate in the two previous policy meetings, expect the BSP to adjust its key policy rate higher going forward,” DBS said.
“Look for a total of 50 bps rate hikes in 2H14 (second half 2014),” the bank added.
The BSP’s next rate-setting meetings are slated on June 19 and July 31.
The policy-making Monetary Board of the BSP has maintained the overnight borrowing and overnight lending rates at 3.5 percent and 5.5 percent, respectively, during its first three meetings for the year. However, the reserve requirement ratio has been raised by a total of two percentage points to mop up excess liquidity in the system.
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Last week, the Philippine Statistics Authority said inflation climbed to a 30-month high of 4.5 percent in May amid higher food prices following supply shocks that emanated after strong typhoons hit the country late last year.
This brought the five-month average to 4.1 percent, above the midpoint of the BSP’s three percent to five percent target for the year.
“At the current pace of growth, there is a good chance CPI (consumer price index) inflation may touch five percent year-on-year in 3Q (third quarter),” DBS warned.
“That will only widen the differential between inflation and policy rate even further. While it may be temporary, it is still likely to trigger a reaction from the central bank,” the bank added.
BSP Governor Amando M. Tetangco Jr. last week said the May inflation print confirmed the central bank’s earlier statements that “the room to keep rates steady has narrowed.”
Tetangco has stressed that the BSP “will not hesitate to adjust policy settings” should inflation targets become at risk of being missed.
