BSP unlikely to raise interest rate on account of low inflation

The central bank of Philippines (BSP) is unlikely to adopt a tighter monetary policy in its meeting scheduled to be held on Aug 11, as long as inflation remains below the central bank’s target range, although gross domestic product continues to remain robust.

Consumer price inflation came in steady at 1.9 percent y/y in July, on the back of a moderation in utilities cost. Core inflation was also steady at 1.9 percent, remaining below the 2 to 4 percent target.

However, recently announced plans to cut the reserve requirement rate (RRR) are based on technical reasons more than a need to boost growth. As the size of funds parked in the term deposit facility grows, lowering the RRR is likely help to better manage overall liquidity of the banking system, DBS reported.

In addition, the central bank kept interest rates unchanged during its June 23 policy meeting, citing robust domestic activity and subdued inflation that supported economic growth. The rates were last adjusted on June 3 as the BSP migrated to an interest rate corridor, which uses term deposit auctions in order to mop up excess liquidity in the financial system to bring money market rates closer to the 3 percent key policy rate.

Moreover, recent data suggests that GDP growth may even reach 7 percent during the first half of 2016, and this would clearly tip the balance towards seeing a rate hike earlier than what is being currently expected. Meanwhile, there is almost no reason that the BSP should be worried about growth momentum.

"We reckon that the BSP remains cautious about double-digit loan growth amid the robust investment momentum currently seen," DBS commented in its research note.