By Mikhail Franz E. Flores, Reporter

BSP seen to resume tightening cycle in Q2 next year -- Barclays

Posted on October 26, 2014

Further monetary tightening won’t come until the second quarter of next year, Barclays Plc forecast, as key rate adjustments by the Monetary Board may take a backseat as inflation slows.

The board, in its meeting last Thursday, paused its tightening cycle as it now sees inflation easing this year until 2016.

“We view the BSP's latest commentary as more balanced than its meeting in September, when it displayed a clear hawkish bias,” Barclays economist Rahul Bajoria said in a research note released on Friday.

“As such, we think the next policy move is only likely to come next year, and we forecast a 25bp (basis points) rate hike in Q2 2015, as strong growth and increases in inflation should provide the basis for the BSP to tighten policy, albeit in a gradual manner,” he added.

The central bank adjusted monetary policy tools earlier this year to anchor upside risks to inflation. It raised key interest rates by a total of 50 basis points (bps) to 4% and 6% for overnight borrowing and lending, respectively; special deposit account rates also by a total of 50 bps to 2.50%; and banks’ reserve requirement ratio by a total of two percentage points.

“The BSP was more balanced in its statement, as a more manageable inflation outlook (due to fall in oil prices) creates room to evaluate the impact of previous rate hikes,” Mr. Bajoria said.

“The central bank believes that the bulk of the impact of the two rate hikes made this year will be felt in 2015.”

The economist added that the central bank will not likely overshoot its 3-5% inflation target range for this year given the falling price of oil, which accounts for a large portion of the inflation basket.

“We see balanced risks to our 2015 (average) inflation forecast of 3.8%,” the note read.

The Monetary Board, on Thursday, cut its inflation forecast to 4.4% from 4.5% in 2014; to 3.7% from 3.8% next year; and, to 2.8% from 3% for 2016.