The Bangko Sentral ng Pilipinas will likely increase key policy rates by 50 basis points next year and a bigger adjustment is not far-fetched, UBS Securities Philippines, an affiliate of UBS AG, said in a report.
“... we do not discount the possibility of a bigger increase than this, particularly if the US Federal Reserve were to increase interest rates by a more substantial 125 bp,” UBS said.
The Monetary Board on Dec. 11 kept the benchmark interest rates for overnight borrowing steady at 4 percent overnight lending at 6 percent due to a more manageable inflation environment.
Inflation in November slowed down further to 3.7 percent from 4.3 percent in October as the food supply condition normalized. This brought inflation average in the first 11 months to 4.3 percent, higher than the mid-point of the target range of 3 percent to 5 percent for 2014.
UBS also said that liquidity next year might also not be as high as in 2014, “when the impact of the BSP’s significant easing in 2013 was being felt and low yields were leading to a shift from bonds to equities.”
Domestic liquidity or money supply in the financial system grew 15.4 percent in October to reach P7.2 trillion from P6.24 trillion year-on-year. The expansion was slower compared with the 16.2-percent growth in September.
The Bangko Sentral earlier said domestic liquidity growth was expected to moderate further in the months ahead as previous monetary policy adjustments worked their way through the economy.
The central bank in March and May raised the banks’ reserve requirement ratios by one percentage point each to address the issue of excess liquidity in the financial system.
In June, the Bangko Sentral increased the interest rates on SDA by 25 basis points to 2.25 percent from 2 percent across all tenors for the same purpose. On Sept. 11, SDA rates were again increased by 25 basis points to 2.5 percent across all tenors.
Meanwhile, UBS expects the Philippines to register the second-strongest gross domestic product growth of 6 percent in Asia in 2015, which could bode well for the market earnings.