BSP seen to keep rates steady through early 2013

Posted at 12/10/12 12:35 PM

MANILA - The Philippine central bank will likely hold its key policy rate steady at a record low on Thursday and keep it there through at least the early part of next year, with inflation seen as manageable and the economy expected to remain on solid footing in 2013. 

All but one of 13 economists polled by Reuters said the central bank's policy-making Monetary Board will vote to hold the rate at 3.5 percent after inflation slowed more than expected in November despite the economy's surprisingly strong third-quarter growth. 

The economy expanded by 7.1 percent in July-September from a year earlier and 1.3 percent from the previous quarter, prompting many analysts to raise their 2012 and 2013 growth forecasts, but the outlook is without risks.  

While many of them believe the central bank will hold off on policy action in the early part of next year, they have contrasting views on where interest rates are headed in the later part of 2013. 

If the global growth outlook were to deteriorate, some economists said the central bank may cut interest rates further to fortify the country's economic buffers. 

"We expect the central bank will keep rates on hold this month, as the central bank takes time to monitor the impact of recent policy loosening on the economy," said Gareth Leather, economist at Capital Economics in London. 

"However, if global growth remains as weak as we expect over the next year and the crisis in the euro zone continues to intensify, further loosening is likely in 2013," Leather said. 

Others took the opposite view, arguing demand-pull inflationary pressures will likely return on strong domestic demand and that may justify as much as 50 basis points in hikes in the second half of 2013. 

Euben Paracuelles, economist at Nomura in Singapore, said the central bank will probably be more tolerant of a strong peso to manage inflation, and will opt for non-rate tools to counter speculative inflows that have increased currency volatility. 

The central bank has said it was considering limiting currency forward positions that banks are allowed to hold to tackle speculation in the foreign exchange market. 

The country is targeting faster growth of 6 percent to 7 percent next year from 5 percent to 6 percent this year, banking on an increase in domestic consumption and higher government spending.  

The government has set aside a record of more than P400 billion ($9.8 billion) for infrastructure projects and capital outlays under next year's P2.01 trillion budget. 

Governor Amando Tetangco said last week the central bank's monetary policy stance remains appropriate, while his deputy, Diwa Guinigundo said the economy does not need more fiscal and monetary support at this point.  

The Bangko Sentral ng Pilipinas last cut its key overnight borrowing rate by 25 basis points in October, bringing total rate cuts this year to 100 basis points to shield the economy from the global downturn and contain the peso's strength.  

The peso is the best performing currency in Asia so far this year, having gained more than 7 percent against the U.S. dollar.