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Further monetary tightening in Philippines seen up ahead

Publication Date : 31-03-2014


After raising the reserve requirement on banks last week, the Philippine central bank is seen adopting more monetary tightening measures to address excess liquidity and rising inflationary pressures.

“Sounding hawkish but with policy rates unchanged implies future tightening actions. This could be interpreted as BSP accommodation of weak Philippine peso in the near term while sustaining weak market sentiment for the long bonds,” said Citibank economist Jun Trinidad.

The Bangko Sentral ng Pilipinas (BSP) indicated its tightening stance but opted to delay hiking its main policy rates to support growth, HSBC economist Trinh Nguyen said.

But with a weakened currency, likely higher electricity prices, and potentially increased rice prices due to the loss of output from Supertyphoon “Yolanda,” she said headline inflation would likely spike toward the end of the second quarter, prompting further action from the central bank.

HSBC expects the central bank’s key interest rates to rise in the second quarter, albeit gradually, beginning with a 25-basis point hike and another hike in the third quarter to take the overnight borrowing rate to 4 per cent by end-2014.

For its part, Standard Chartered Bank expects the BSP to continue raising the reserve requirement ratio on banks at its two monetary policy meetings this second quarter. It said the ratio may be raised by 1 percentage points each during these two meetings to reach 21 per cent and keeping it at this level through yearend.

In a report written by Stanchart economists Jeff Ng and Danny Suwanapruti, the overnight borrowing rate of the BSP may rise by 25 basis points to 3.75 per cent in the third quarter and further to 4 per cent in the fourth quarter of this year. The rate on special deposit accounts (SDA) is likewise seen to increase by 25 basis points to 2.25 per cent in the third quarter and further to 2.5 per cent in the fourth quarter of this year.


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