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Deutsche Bank sees Philippine central bank raising borrowing rate

Publication Date : 09-07-2014

 

The Philippine central bank may hike its overnight borrowing rate by a quarter-percentage point during its monetary setting on July 31 to address rising inflation, said an economist from European banking giant Deutsche Bank.

In a commentary dated July 4, Deutsche Bank economist Diana Del-Rosario said the tightening of the overnight borrowing or reverse repurchase (repo) rate would likely be complemented by another 25-basis point rate hike in the special deposit account (SDA) rate.

Del-Rosario said the slight dip in the country’s June inflation rate to 4.4 per cent versus the market consensus of 4.6 per cent was mainly due to the deceleration in the price index of the housing, water, light, and fuel complex, which had a 23-per cent share in the consumer price index basket
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She noted that the increase in transport costs slightly moderated in June but argued this was only due to a favorable base effect.

“In fact, we still see significant upside risks to inflation from the June data. The food and non-alcoholic beverages complex, bearing a 39-percent share, saw prices accelerate (by) 70 basis points to 7.4 per cent in June (0.1 per cent month-on-month versus. 0.7 per cent in May), marking the fastest price increase in five years,” she said.

The economist also cited continuing price pressures in all food groups, except the fish and fruit indices.

She added that hikes in school fees at the start of the school year in the Philippines had also brought the education index higher while prices of clothing and footwear, furnishings and household equipment and health continued to firm up in June.

Taking out volatile items in the consumer price index like food and energy-related items, core inflation in the Philippines softened by 30 basis points in June.

“Year-to-date inflation still looks manageable at 4.2 percent, well-within the BSP’s 3-5 per cent inflation target for 2015. But with significant upside risks to inflation coming from elevated food and oil prices and the transport fare hike in Manila in mid-June, (the) June (inflation) print may only be a temporary dip before inflation bounces back near the 5 percent upper band in the next two months,” Del-Rosario said.

“We thus think that a 25bp-repo rate hike is still in the cards at the July meeting as a preemptive move to anchor inflation within target. This move will likely be complemented by another 25bp-SDA rate hike to gradually bring credit growth down, from the latest May print of 21.1 per cent year on year (net of reverse repurchase placement with the BSP) to the long-run average of about 15 per cent, in our view,” she added.

The SDA is a potent monetary tool created by the Bangko Sentral ng Pilipinas to mop up excess liquidity in the system, offering higher yielding deposit instruments at the central bank that can cascade to the broader market.

During its monetary policy-setting last month, the BSP kept its overnight borrowing rate—contrary to most expectations that it would be tightened then—at 3.5 per cent but raised the SDA rate by 25 basis points to 2.25 per cent.


 

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