BSP to keep policy rates until Q3, economists say

The Monetary Board, the policy-setting body of the Bangko Sentral ng Pilipinas, would likely keep its key rates unchanged, while implementing its exit strategy after the country's gross domestic product (GDP) grew at its fastest rate in the first quarter of the year. New York-based think tank Global Source Partners, however, believes that the Monetary Board would raise the reserve requirements for banks from the current 19 percent to siphon off liquidity from the financial system as a way of controlling inflation. "Despite the surprise GDP growth recorded for the first quarter, our guess is that like many central banks in Asia, the BSP will tread lightly in the execution of its exit strategy, at least until global headwinds start to weaken and the domestic rebound firmly established," Global Source Partners said. "This could take off the table any tightening of the policy rate during the Monetary Board meeting on June 3, although there is market talk that peripheral measures such as hiking the reserve requirement (the last adjustment made at the height of the global crisis in 2008 aside from rate cuts that has yet to be reversed) may be implemented," the think tank said. The Monetary Board will assess the impact of the debt crisis in Europe as well as the growing tension between North and South Korea on the Philippines during its meeting this week. "To the extent that the euro zone sovereign-debt crisis will be a risk to growth, policy rate-setting will continue to be a balancing act for Philippine monetary authorities over the next couple of months," it said. The think tank sees Philippine inflation within target, "but there are real risks, although commodities prices, a major source of pressure, should moderate with global demand disruptions." As the BSP prides itself in managing inflation, Global Source Partners said the Philippine central bank is not a purist and remains true to its dual role of preserving growth and price stability. "It will thus have to look at the strength of domestic and global recovery." The think tank said the BSP would make policy-rate adjustments at the end of the year. "We expect a tweaking of the policy rate to occur later in the year, especially as expectations of a US Fed policy hike have already been moved forward to 2011." Metrobank's First Metro Investments Corp. (FMIC) and University of Asia and the Pacific (UA&P) believe the BSP would keep its key rates until the third quarter of the year. "This is the result of better inflation data for the past months and crude oil prices dropping below $70 per barrel," FMIC and UA&P said in its monthly "Market Call." The monthly study said that the BSP is now concerned with the possible downturn of the economy as the euro-zone problems continue to boil. "BSP is now thinking of finding ways to prime the economy in order to be better prepare for the adverse impact of that lingering crisis," FMIC and UA&P said in the study.—VS, GMANews.TV