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HSBC sees BSP holding rates; Barclays eyes cut next week

HSBC continues to project that the central bank’s policy-making Monetary Board (MB) will maintain policy rates next week amid the uptick in the country’s inflation rate to a seven-month high last August but Barclays sees otherwise.

The rate of price increases rose to 3.8 percent last August from month-ago’s 3.2 percent bringing the average to date at 3.2 percent, at the lower end of the government’s three to five percent target until 2014.

In a report dated Aug. 5, 2012, HSBC economist Trinh Nguyen cited that expected increase in domestic inflation in the near term along with still high oil prices in the world market are enough reasons to maintain the policy rates.

The report said the country “has enjoyed strong growth so far this year due to strong private and public spending.”

“The elevated core inflation readings in recent months reflect this,” he said.

Core inflation for last August alone rose to 4.3 percent from month-ago’s 4.1 percent resulting to an average of 3.7 percent for the first eight months this year.

Relatively, the domestic economy rose by 6.1 percent in the first half this year, higher than the year-ago’s 4.2 percent.

The HSBC report said monetary officials “will have a few things to consider” when it meets next week.

“Global prices continue to be elevated despite sluggish growth momentum; the actions of the Fed; external demand will likely prove weak in the third quarter; but domestic demand in the Philippines will stay strong. While these other considerations matter, the higher-than-expected headline inflation August number will motivate monetary officials to keep rates on hold,” it added.

Barclays economist Prakriti Sofat said last August inflation is above Barclays’s 3.6 percent forecast and market’s expectations of 3.5.

Because of the increase in the inflation rate, Barclays revised upward its year-end inflation forecast to 4.2 percent but maintained its 3.5-percent average inflation projection for the year.

Relatively, Barclays sees a “moderate” domestic expansion in the second half this year “given the weak external environment and some pass-through to domestic demand.”

“We believe the impact of the recent floods on GDP [gross domestic product] will be modest,” it said.

“This should help core inflation pressures to moderate with a lag,” it said.

And because of the increase in the inflation rate and continuation of a harsh external environment, Barclays eyes another 25 basis point cut in the Bangko Sentral ng Pilipinas (BSP) rates during the MB meeting Thursday next week.

“Our view has been that the BSP will likely lower rates in September, but given the strong GDP print, some paring back in Php (peso) strength and the central bank acknowledging the pickup in government spending, we think the central bank may be tempted to retail its policy buffer for longer,” the Barclays report said.

Aside from the inflation rate, other key indicators that monetary officials will consider during the policy meeting next week are exports data, which the government will release on September 11, 2012, it said.

The MB has cut BSP’s policy rates by a total of 75 basis points, 25 basis points each in January, March and July.

To date, the overnight borrowing rate is at record-low of 3.75 percent and the overnight lending rate is at 5.75 percent.

These were maintained during the Board’s policy meeting last April and June to enable monetary officials to assess the impact of the rate cuts in the first quarter of the year. (PNA)

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