Barclays: No need for BSP to hike policy rates until 2017

London-based Barclays does not see the need for the Bangko Sentral ng Pilipinas (BSP) to raise rates until the second quarter of 2017 because of the stable economy and low inflation rate. 

“This expected hike is also likely to materialize if growth has recovered sufficiently and inflation is high enough to justify an increase in interest rates,” Barclays said in a research note.

Last Thursday, the policy-making Monetary Board (MB) decided to maintain policy rates after noting that inflation dynamics and risks to the outlook remained firm, and domestic demand continued to be strong.

To date, the BSP’s overnight borrowing or reverse repurchase rate (RRP) is at 4 percent, and the overnight lending or repurchase (RP) rate is at 6 percent.

These were last adjusted in September 2014 when they were hiked by 25 basis points to address the rising inflation rate. That year, the key rates were increased by a total of 50 basis points.

Barclays, in the research note, said the normalization in the Federal Reserve rates that started Wednesday after a 25-basis points increase to 0.25-0.5 percent, was not expected to give the BSP a hard time on its policy stance.

“Although there is external uncertainty in the form of the Fed rate hike cycle, we think the Philippines’s strong external position and low level of short-term debt provide the BSP with enough policy space to maintain an accommodative stance even with rates US heading higher,” it added.

BSP Governor Amando Tetangco Jr. said the inflation forecast for 2015 was seen to stay below the government’s 2- to 4-percent target but was seen to go up to within target levels in the next two years due to the impact of the extended dry season as a result of El Niño.

The MB maintained its 2015 average inflation forecast at 1.4 percent, but hiked the forecast for 2016 to 2017 at between 2.4 percent and 3.2 percent, from 2.3 percent and 2.9 percent during the MB meeting in November.

The government’s inflation target for 2015 to 2018 was placed at a range of between 2 and 4 percent.

The projection of higher but within-target inflation rate in the next two years was due to the impact of the extended El Nino and pending power rate hikes, Tetangco said.

He also said domestic demand conditions remain strong and “are likely to stay firm, supported by solid private household and capital spending, buoyant market sentiment, and adequate domestic liquidity.”

He said the impact on global financial condition of the Federal Reserve’s decision to increase key rates by 25 basis points this week was also considered.

He said this was made as the MB noted that “keeping monetary-policy settings steady at this juncture would allow the BSP some room to continue to assess evolving global economic conditions and calibrate its policy tools as appropriate.”

With these factors, the MB “believes prevailing monetary-policy settings are appropriate, given the outlook for inflation and domestic activity.”

“Going forward, the BSP will continue to monitor domestic and external developments to ensure that the monetary-policy stance remains in line with price and financial stability,” he added.

Tetangco added that the increase in US rates bodes well for emerging market economies (EMEs).

The decision of the Federal Open Market Committee (FOMC) “brings an end to the liftoff uncertainty,” Tetangco said. “The Fed’s statement should anchor confidence on the path of growth and inflation in the US.”

The Fed said the decision to increase rates for the first time in nearly a decade indicates improvement in the world’s largest economy.

But it said, “the Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”

“The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” it said.

This development may flatten US yield curve, Tetangco said noting that it “would be positive for EMEs that have exposures in the long end of the curve or are planning to tap this sector for funding.”

The BSP chief also sees sustained weakness of currencies in Asia as what have been seen in recent days.

“This may continue, as would the outflows, but possibly not in significant magnitudes as in the past,” he said.

Tetangco said the Fed vowed gradual increases in the coming months and this “may be further moderated as the US enters an election year.”

“That said, on balance, the Fed action should be constructive for EMEs,” he added. LUIS LEONCIO