The Bangko Sentral ng Pilipinas is expected to keep its key interest rates unchanged on Thursday, November 12, as the country’s economic growth remains resilient and liquidity is abundant, according to HSBC’s latest Global Research report.
“We have said for some time that we expect monetary policy in the Philippines to remain uneventful in 2015. Growth continues to hold up alongside robust domestic consumption and investment, and the momentum should persist into next year,” HSBC economist Joseph Incalcaterra said in his ‘Philippines central bank watch’ report.
The central bank has kept its benchmark interest rate steady at four percent for eight straight meetings. It also kept its overnight lending rate at six percent.
He said that growth would be sustained through next year’s elections, but slowdown in remittance growth is a cause of concern.
The bank’s economist said that higher infrastructure spending will help boost the country’s economic growth. Infrastructure spending has picked up and the government has set an ambitious target 2016 growth of 43 percent above 2015.
The county’s economic growth rebounded to 5.6 percent in the second quarter, placing the country in a better position to weather the global fallout from China’s economic woes, the National Economic and Development Authority (NEDA) said earlier.
Boosted by higher government spending, the April to June gross domestic product (GDP) outpaced the 5-percent growth in the first quarter, which was the lowest in three years.
Meanwhile, he said that the BSP remains justifiably focused on inflation risks stemming from El Niño.
Inflation reached a record low of 0.4 percent in October, mainly on stable food prices.
“Ultimately, there is little for the BSP to do for now and we forecast rates to stay on hold through year-end.”
The report also cited that domestic retail gasoline and electricity prices have started to tick higher over the past two weeks, which will likely push inflation higher.
“Barring a further leg-down in energy prices, we expect inflation to rise over the coming months and come back into the BSP’s 2 percent to 4 percent target in the first quarter of 2016 even without any particularly strong disruptions from El Niño.”
Incalcattera said that BSP is going to look through the record-low reading and resist any temptation to adjust rates this year. The BSP has set its last Monetary Board meeting in December, on the same day of the Federal Open Market Committee (FOMC) decision, which the HSBC expects the US Fed to lift rates.
However, he said that 2016 will be a pivotal year for the BSP as the interest rate corridor framework is introduced alongside policy, inflation and external growth uncertainties.
“Once particular concern we discuss in this piece is the slowdown in remittance growth. True, FX effects can explain a part of the slowdown, and the economy is insulated for now as peso-denominated remittances continue to grow. But over the long term, growth may settle at a slower pace as the deployment of overseas foreign workers may have already peaked.”
However, Incalcaterra said that there may be some need to make small adjustments rates from a logistical point of view, in tandem with the implementation of an interest rate corridor (IRC), scheduled for the second quarter of 2016, which involves the deposit and lending facilities as the lower and upper bounds of the corridor. It is not expected to have a strong impact on the level of interest rates, but the current 350bp spread between the lending rate (repurchase rate) of 6 percent and the borrowing rate (SDA) of 2.5 percent may need to be narrowed to enhance the effectiveness of the corridor and level of guidance for the policy rate.