BSP to keep overnight rates on hold, likely to hike in H2 2016

The Philippines’ central bank is likely to keep its overnight rates on hold again at 4% (RRP) and 6% (RP) together with the special deposit account at 2.50%. The BSP is not expected to change rates in H1 2016 with the upcoming Presidential elections and the shift to the interest rate corridor (IRC) that is likely to happen in April. Domestic conditions continue to be steady for Philippines in spite of headwinds from the external sector. The Philippines’ economy had expanded 6.3% y/y in Q4 2015, more than market consensus of 5.9% y/y. The GDP growth for entire 2015 was 5.8% y/y.

Even though exports were soft in 2015, government and consumer expenditure increased the growth figures along with a considerable 14% growth in gross fixed capital formation. The recent exports data indicated that the country is being plagued with weak trade conditions.

In spite of the port congestion problem in 2015 creating low base effect, exports did not rebound and declined 3.9% y/y in January, the 10th consecutive month of decline. However, strong domestic conditions, which are driven by consumption and timely disbursement of the budget, trade conditions are not expected to worry the central bank.

On the inflation front, the country continues to see low rates of price increases. The Philippines recorded CPI of 0.9% y/y, after showing signs of rebounds towards the target rate in the earlier three months, where the rate accelerated at one point to 1.5% y/y in December 2015. BSP Deputy Governor Diwa Guinigundo had mentioned that inflation is likely to accelerate slowly towards the lower-end of the 2-4% target set by the monetary authorities for 2016-2018. Diwa Guinigundo had taken gradual rebound in oil price into account. Meanwhile, the peso regained certain strength against the USD in late February and reached a near five-month high in mid-March against the USD.

In spite of the progress seen in domestic conditions, the central bank is not expected to change the policy conditions in near term given the upcoming volatility from the Presidential elections and transition t o the IRC. However, a rate hike is likely in H2 2016.