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By Diane Claire J. Jiao, Senior Reporter


BSP not expected to cut rates




Posted on December 10, 2012


MONETARY authorities are expected to keep policy rates on hold when they meet this Thursday, analysts said, with economic growth firming up and inflation risks on the upside.

Nine of the 10 economists and traders polled by BusinessWorld said the central bank’s policymaking Monetary Board would likely keep key rates unchanged at 3.5% and 5.5% for overnight borrowing and lending, respectively.

"We maintain our view that the Bangko Sentral ng Pilipinas (BSP) will hold rates unchanged ... We think the gross domestic product (GDP) data is a game-changer as far as the monetary policy stance is concerned," Nomura economist Euben Paracuelles said in an e-mail.

The Philippines saw GDP growth improve to 7.1% in the third quarter, taking the year-to-date average to 6.5%. It beat market expectations of an easing and also topped the government’s 2012 target of 5-6%.

HSBC economist Trinh Nguyen said developments abroad also point to recovery, noting that China is poised for a rebound and the United States buoyed by consumer sentiment.

Growth prospects, meanwhile, could signal inflation risks, DBS Ltd. economist Eugene Leow said. The BSP could thus seek to temper price pressures by keeping policy rates on hold.

While inflation has remained tame this year, the central bank sees an uptick in 2013. It has forecast consumer prices to increase by 3.3% this year and by 3.9% the following year.

"Indeed, even the BSP expects inflation to be slightly higher in 2013. We expect inflation to average 3.2% in 2012 and 3.7% in 2013," Bank of America-Merrill Lynch analyst Jojo Gonzales said in a separate e-mail.

Other market players noted the same trend.

Standard Chartered economist Jeffrey Ng forecast inflation to climb to 3.9% in 2013 from 3.2% this year. DBS predicted a sharper hike to 4.1% from 3.3%, while Nomura pegged inflation to as high as 4.6% for next year.

With these risks, the BSP could keep policy rates unchanged this week and for much of 2013. Should it change its stance next year, it would be to tighten, they all said.

Capital flows are expected to be a critical factor. The peso has seen a sharp appreciation as foreign investors flock to local markets, seeking better yields as advanced economies flounder.

The currency closed at P40.945 to the dollar on Friday. It has gained by 6.6% from its end-2011 close, despite the central bank’s dollar purchases.

"It is very important for the BSP to cut policy rates to reduce capital inflows. The peso appreciation is killing local businesses," University of Asia and the Pacific economist Victor A. Abola said.

A strong peso is a bane for sectors that earn in dollars -- exports, business process outsourcing and overseas workers.

Nomura’s Mr. Paracuelles pointed out, though, that external demand is weak anyway, and Standard Chartered’s Mr. Ng said macroprudential tools would be more appropriate to slow down capital inflows.

The BSP has implemented various measures to temper capital inflows, such as preventing non-residents from parking money in its special deposit accounts.

Mr. Abola, however, insisted that "Macroprudential measures can only work to some extent. Policy rates are still more powerful than administrative measures."