Strong GDP to prompt BSP to raise policy rates

American financial conglomerate Citigroup on Tuesday said that the sustained Philippine economic recovery will prompt the Bangko Sentral ng Pilipinas (BSP) to raise its key policy rates currently pegged at record lows. “We expect Monetary Board to adjust overnight rates perhaps starting [in the] second quarter of 2011," Citigroup said in its Asia Macro and Strategy Outlook entitled “Prospects for 2011." “With or without fiscal stimulus, eight straight quarters of favorable growth since the first quarter of 2010 would be a compelling argument for rates normalization," Citigroup added. The BSP lowered its key policy rates by 200 basis points from December 2008 to July 2009 to cushion the domestic economy from the global economic meltdown. The BSP's Monetary Board has kept its interest rates steady at record lows for 12 straight policy setting meetings since July 2009. The overnight borrowing rate is currently pegged at a record low of 4 percent while the overnight lending rate is at 6 percent. “Over the fiscal year 2011 to fiscal year 2012 horizon, the country’s gross domestic product (GDP) will settle within trend growth. Driven by domestic demand, we expect 6.7 percent growth in 2011, following the estimated 6.5 percent growth in 2010, Citigroup said. Citigroup’s 2011 GDP forecast for the Philippines is lower than the 7-8 percent made by the Development Budget Coordination Committee (DBCC). Latest data released by the National Statistical Coordination Board (NSCB) showed that the country's GDP grew by 7.5 percent in the first three quarters of the year from the 7 percent a year earlier. Extended momentum The Philippine economy is growing from the extended momentum of real investments, the capacity utilization rate of 80 percent, the consumption growth of at least 5 percent, and the strong remittances of overseas Filipino workers, the US-based investment bank said. Citigroup said it does not expect aggressive fiscal spending over the next two years as the Aquino administration focuses on social spending particularly the conditional cash transfer program. “Fiscal tightening will persist unless tax revenues respond favorably to ongoing fiscal initiatives that weed out corruption and tighten compliance while getting a lift from upbeat growth," it noted. According to Citigroup, the government would struggle to keep the tax effort within 14-15 percent of GDP as there is a need for President Benigno Aquino to rethink the government’s fiscal strategy and to draw up plans to raise taxes and restructure the revenue base. — DM/VS/OMG, GMANews.TV