Manila, Philippines - British banking giant HongKong and Shanghai Banking Corp. (HSBC) expects the Bangko Sentral ng Pilipinas (BSP) to keep interest rates unchanged at record lows on Thursday due to upside risks on inflation and the stronger-than-expected growth in the first quarter.
In a study, HSBC economist Trinh Nguyen said the BSP’s Monetary Board is likely to keep the overnight borrowing rate and the overnight lending rate steady on June 14.
“As such, the BSP will likely keep rates steady at the upcoming meeting. The external environment remains weak but growth prospects in the Philippines have brightened,” Nguyen stressed.
The Philippines posted a surprising gross domestic product (GDP) growth of 6.4 percent in the first quarter of the year from the revised four percent in the fourth quarter of last year on the back of strong domestic demand, higher government spending, and recovering exports.
The growth was achieved as the BSP managed to keep inflation rate at bay at three percent in the first five months of the year or within the lower end of its full-year target of three percent to five percent.
The National Statistics Office (NSO) reported last week that the country’s inflation eased slightly to 2.9 percent in May from three percent in April on the back of easing transportation costs.
The BSP is unlikely to take the bait of easing inflation to cut rates as the 6.4 percent GDP growth in the first quarter of the year surpassed the government projection of 5.2 percent.
The Monetary Board has so far slashed interest rates by 50 basis points due to benign inflation environment and fragile global economic growth. The central bank reduced rates by 25 basis points last Jan. 19 and by another 25 basis points last March 1, bringing the overnight borrowing rate back to a record low of four percent and the overnight lending rate to six percent.
“Given that domestic demand was high in the first quarter, coupled with a 50 basis point policy cut, which would likely filter through in the coming months, inflation pressures tilt on the upside. With growth less of a concern, the BSP will likely keep rates steady to monitor price and external conditions,” she said.
The BSP decided to keep interest rates unchanged during the policy rate setting meeting last April 19 to allow monetary authorities to assess the impact of the earlier rate reductions on the domestic economy.
“Given that demand was high in the first quarter and inflation was relatively subdued, some filtering of this would come in the second and third quarter. Added to this, the effects of the 50 basis point cut in the first quarter are still being measured,” Nguyen explained.
She warned that the risks to rising commodity prices are on the upside as China is expected to ease further and likely rebound in the second half and that the easing of food prices may not last for much longer as demand pressures are high.
However, HSBC is confident that inflation would still fall within the BSP target of three percent to five percent despite elevated inflationary pressures.
“With trade performing much better than expected and GDP growth for the year likely exceeding four percent, the BSP has room to monitor price conditions,” Nguyen said. - By Lawrence Agcaoili