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BSP may raise key rate anew |
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By Ted P. Torres
The Philippine Star 11/07/2005 The US-based Citigroup expects the Bangko Sentral ng Pilipinas (BSP) to raise its key overnight rate by another 75 basis points (bps) to curb inflation resulting from double digit liquidity growth. This is also in line with the US Fed’s recent move to raise its rate to four percent, Citigroup said in its Philippine Market Weekly report. The 75-bps increase is actually conservative. The rate may increase by as much as 375 basis points pushing the BSP’s overnight rate to well over 11 percent, the report said. The report also forecast a full-year inflation of 7.8 percent for the country this year, within the BSP’s own projection of 7.6 to 7.9 percent and well over the National Government’s target of five to six percent. For next year, Citigroup forecasts inflation to slightly improve to 7.6 percent, lower than the BSP projection of 8.5 percent but higher than the NG’s four-to five-percent target. The report said rising fuel prices, excess money supply, and impact of the expanded value added tax (EVAT) would shatter the government’s target of four to five percent next year. This, according to Citigroup, would force BSP to tighten its monetary policy. "Consumers will ‘resist’ paying the higher taxes that may undermine the consumer markets and contribute to easing inflation in the second semester of 2006," it added. Citigroup pointed out that while monetary policy may not be potent enough versus high oil prices, it is expected to address potential second round effects of global oil prices. The seven percent inflation level in September (it was the same level in October) is only a breather as domestic demand becomes weaker than expected. The risk of the second round effects persists with manufacturers’ margins being compressed, the report observed. The global financial institution said that a double-digit increase in the producers’ price index (plus 12.2-percent year-on-year increase in August) against single digit inflation strongly hints at compressed margins eventually leading to manufacturing costs being passed on. "Monetary policy will not react to short-term and direct impacts of price events. Conditions become approriate for decisions to raise policy rates if these price shocks bring about lasting price effects, which probably will be captured over the medium term when second round inflation effects or inflation risk remains high," the report added. Meanwhile, the peso will remain strong against the dollar supported by inbound remittances plus the prospects of the BSP buying dollars is bound to cause the peso to stay or "at times could lead to a reversal with corporations eventually joining the fray so as not to be deprived of foreign exchange." Corporate demand has been somewhat slow in the previous months. "We believe that this move of allowing the local currency to appreciate is part of monetary tightening and supplements the cummulative 50 bps adjustment by the Monetary Board in September and October. It also implies restrained expansion of BSP’s stock of international reserves, which rose sharply by 23-percent YOY in August. Reserve money rose 18.8 percent. Citigroup said the monetary authorities would likely be tempted to buy surplus foreign currency (forex) if the peso remains at the P54 to P54.50 level. The peso was at its strongest at P53.94 in March 16 this year. The report said that the forex market will not be distracted by poor trade activities. Recent data indicate a slowing down of exports and recovering of imports resulting in a trade deficit that expanded to $603 million with year-to-date deficit of $2.87 billion. The widening trade gap in January to August (28-percent YTD rise) to keep current account surplus intact during the period. |
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