MANILA, Philippines – Increasing pressure on inflation may finally prompt the Bangko Sentral ng Pilipinas to raise key policy rates next month, Singapore-based DBS said.
“As early as the next policy meeting, we may see a 25bps (basis point) rate hike in the key overnight borrowing rate. Clearly, the central bank is a little concerned with regards to rising inflationary pressures in the economy,” DBS said in a research note.
The Monetary Board, during its policy meeting on Thursday kept key policy rates steady but hiked the Special Deposit Account rate by 25 basis points to 2.25 percent.
Monetary authorities stressed the inflation path remains within the three to five percent target range although they hiked the forecast average for the year to 4.4 percent from 4.3 percent.
Upside risks to inflation include the potential impact of El Niño on food and utility prices, as well as the pending power rate adjustments.
“Indeed, we see a good chance for CPI inflation inching just above the five percent mark in 3Q14, which is the upper limit of the central bank’s three to five percent comfort zone,” DBS noted.
Business ( Article MRec ), pagematch: 1, sectionmatch: 1
Inflation hit a 30-month high of 4.5 percent in May, bringing the five-month average to 4.1 percent.
For next year, the central bank has forecast the rate to average 3.7 percent, up from an earlier projection of 3.4 percent but still within the two to four percent target range.
“The tight monetary policy stance may provide support for the peso, which will help to ease imported inflationary pressures. More importantly, this also makes perfect sense since the government is busy trying to boost investment growth in the economy,” DBS said.
“Imports of capital goods are crucial for the outlook on investment growth going forward,” the bank continued.
Overnight borrowing and overnight lending rates were unchanged at 3.5 percent and 5.5 percent, respectively.
The SDA rate, however, was raised to mop up excess liquidity in the system. This came following a total of two percent hike in the reserve requirement ratio of banks meant to rein in liquidity growth, which has persisted above 30 percent since July last year.
“Downside risks on GDP growth from higher interest rates are still limited at this juncture. Domestic demand drivers remain strong,” DBS recounted.
“And it is not like the BSP will tighten too much anyway, for the central bank is likely to raise the overnight borrowing rate to four percent before staying put for some time,” the bank added.
