BSP holds fire on rates, but tightens liquidity

Posted at 03/27/14 4:48 PM

MANILA (UPDATE) - The Philippine central bank left its policy rate steady on Thursday, as expected, after it lowered its inflation outlook but analysts say tightening is on the cards as growth stays resilient and with possible upside risks to prices.

Strong imports of capital goods and buoyant investment growth in the Southeast Asian country at a time when the peso is weaker will likely keep the central bank in a hawkish mood.

The Bangko Sentral ng Pilipinas (BSP) kept its overnight borrowing rate at a record low of 3.5 percent for the 11th straight meeting. It also left the rate on its short-term special deposit account (SDA) window unchanged, but raised banks' reserve requirement ratio (RRR) by 1 percentage point to 19 percent.

"Raising the RRR should start to weigh on money supply and work to contain inflation pressures. Hence, some of the detail is hawkish," said Jonathan Cavenagh, senior FX strategist with Westpac in Singapore.

The decision came after the central bank slightly lowered its inflation estimates for this year and next, saying the outlook was within target although there are upside risks from possible increases in utility, food and oil prices.

Gradual tightening in money conditions points to an increase in the country's key policy rate soon to further rein in cost pressures. Some analysts say the central bank may raise the benchmark rate as early as its next policy review in May.

Comments from central bank Governor Amando Tetangco in recent days pointing to an early and gradual policy adjustment, also suggest a firming in rates was not far off.

Ten out of 12 analysts polled by Reuters had expected the policy rate to be kept on hold at 3.5 percent. The two dissenters forecast a 25-basis-point hike in the policy and SDA rates, saying the move was needed to keep a lid on liquidity growth which hit a record high in January.

Tetangco had said last week "measured" adjustments were needed even as he expected inflation to remain within target. He added policy adjustments may involve key interest rates and other tools, but he did not give details.

The central bank slightly lowered its 2014 average inflation estimate to 4.2 percent from 4.3 percent. It also lowered its forecast for 2015 inflation to 3.2 percent from 3.3 percent. Both remain within policymakers' comfort zone.


Some economists had expected the central bank to first mop up excess liquidity via higher bank reserve requirements, which go into effect on April 4, before increasing interest rates.

"BSP, while keeping rates unchanged at its last meeting as it had telegraphed to the market, has turned more hawkish. As such, it wasn't entirely surprising, although raising RRR by a full percentage constitutes more a normalisation than tightening," said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore.

He said BSP was likely to raise rates as early as the next meeting as RRR was back in neutral, while both nominal and real rates were still accommodative relative to historical levels.

Money supply growth in January hit a record high of 38.6 percent. But the central bank said it expects growth to decelerate to 15 to 17 percent by the middle of the year, as the market fully absorbs revisions in the SDA facility last year and banks lend more.

About a trillion pesos ($22 billion) went out of the SDA facility, a short-term liquidity window, after the central bank lowered rates and limited access by trust departments to the facility last year.

Strong liquidity, analysts have warned, could fan inflation, which has stayed above the mid-point of the central bank's 3-5 percent target for the third month in a row in February.

Tighter policy may lend support to the peso hit by emerging market ructions, in spite of the Philippines' growth prospects.

The peso has fallen about 1.3 percent against the dollar since the start of the year.

On Wednesday, the International Monetary Fund said the Philippine economy would grow faster this year than it earlier expected, driven largely by reconstruction spending after a deadly super typhoon in November.