BSP seen hiking interest rate

British bank Hongkong and Shanghai Banking Corp. said it expects the Bangko Sentral to begin increasing interest rates by the end of the month to curb inflationary pressures.

HSBC said the Monetary Board, the policy making body of the Bangko Sentral, would likely increase overnight borrowing rate by 25 basis points from 3.5 percent to 3.75 percent in its next meeting on July 31.

Inflation rate in June reached 4.4 percent in June, above the midpoint of the Bangko Sentral’s target range of 3 percent to 5 percent. Inflation rate in the first half also settled at 4.2 percent.

“History shows that the BSP raises rates when inflation reaches the upper end of the inflation target. We believe the BSP, thus, will have no choice but to tighten monetary conditions soon to temper inflationary pressures,” HSBC said in a report.

The Bangko Sentral already raised the banks’ reserve requirement twice this year by one percentage point each. The first occurred on March 27 and the second on May 8.

These moves aimed to address the potential risks of excess liquidity in the financial system.

The Monetary Board, in its last meeting on June 19, also raised the rate on special deposit accounts by 25 basis points across all tenors to 2.25 percent from the previous 2 percent.

“We expect two more 25bp hikes of main policy rates and one more 25bp of the SDA rate in the second half of 2014, with the first policy rate hike likely to occur on July 31, 2014,” HSBC said.

“Negative supply shocks will likely drive prices higher. Already, headline inflation shot up in May to 4.5 percent y-o-y from 4.1 percent in April, due to higher food and housing prices,’ HSBC said.

“In the coming months, headline inflation should reach even closer to the upper bound of the central bank’s 3 to 5 percent inflation target range, thanks to the recent fare hike for jeepneys and likely higher food prices,” it said.

The Bangko Sentral earlier said it would assess the inflation deceleration in June if it would have an impact to the inflation target this year.

The bank said it was also monitoring the behavior of domestic liquidity and the domestic financial markets.

Domestic liquidity grew 28.4 percent year-on-year in May to reach P6.9 trillion from P5.4 trillion a year ago. The growth was slower than the 32.1-percent expansion in April.

“As in previous months----though decelerating----M3 growth reading in May continued to reflect the decline in the special deposit account placements of trust entities compared to their levels a year ago, in line with the BSP’s operational adjustments in the SDA facility,” the Bangko Sentral said.

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