Key policy rate seen holding steady until the third quarter

The central bank is likely to hold interest rates at current levels until the third quarter to support economic growth and will be more open to tweaking the rediscounting facility further, British investment bank Barclays Capital said in a research note yesterday. "We continue to expect Bangko Sentral ng Pilipinas (BSP) to keep the policy rate anchored at 4% until Q3 ’10 to support credit growth and domestic demand," the bank said. Barclays Capital said the central bank will continue to pull out first the liquidity boosters meant to spur the market amid the global financial crisis. In what has been perceived by some as a token move away from the currently loose monetary stance, the central bank raised last Jan. 28 the short-term lending rate for banks under a rediscounting facility to 4% from 3.5%. But it kept the key policy rate steady at 4% -- the level held since July last year after a series of rate cuts totaling two percentage points that started in December 2008. Central bank officials have remained mum on when a rate hike will be in the cards, even as socioeconomic officials say this could come after the first half. "The BSP hiked the rediscount rate by 50 basis point in late-January, and there is a possibility that it will raise the rate above the policy rate of 4%. We continue to believe that the central bank is averse to the idea of hiking the reserve requirement, given that it is largely a blunt instrument and does not distinguish between sectors that may still need credit support," it said. Barclays Capital said the rediscounting rate hike should not be viewed primarily as a step back from the BSP’s loose money policy, but rather as an effort to normalize liquidity in the system, as higher rates will lessen the incentive for banks to tap the facility. "This will also give the central bank the flexibility to react to any untoward shocks hitting the global economy [not our expectation], if the need were to arise," it added, pointing out the rediscount facility, at P60 billion, is very small compared with the liquidity in the system. Barclays Capital said it expects inflation this year to hit 6%, higher than the BSP’s target of 3.5%-5.5%, on higher food and fuel costs. But the bank is more upbeat on the economy, with its 4.3% growth projection higher than the government’s forecast of 2.6%-3.6%, but did not provide details for its optimism. During the presentation of the 2009 inflation data last week, BSP officials said price increases will pick up over second and third quarters as the El Niño-induced dry spell damages crops and spur prices of agricultural products. In the same briefing, Deputy central bank chief Diwa C. Guinigundo had said that monthly inflation is unlikely to breach the BSP’s target range and may peak at 5% in the third quarter, since the government has already put in place measures to mitigate the effects of El Niño. It also said that while Philippine merchandise exports grew at their fastest in December -- at 23.6% to $3.3 billion -- since March 2006, "the numbers were a bit of disappointment as Philippines is the only country where December exports came in below market expectations. This we think is explained by unevenness and bumpiness in the recovery." - BusinessWorld