March 21, 2014

BSP hints at “early” policy adjustments

BusinessWorld today reported that the Bangko Sentral ng Pilipinas (BSP) has hinted at making “early measured adjustments” to its monetary policy stance. The article quoted the BSP governor as saying that gradual policy adjustments may be warranted considering the overhauled guidance articulated by Fed chairman Janet Yellen in the last few days. The BSP governor also said that gradual tweaks rather than discrete movements would be less disruptive and would help businesses plan better.

Our take: For the first time in years, the BSP has hinted about transitioning into a more hawkish policy stance. We expect the BSP to use alternative policy tools, such as the SDA rate or the reserve requirement ratio for banks, to gradually siphon excess liquidity from the system before raising the benchmark policy rate. While many analysts expect the BSP to raise the policy rate in 2H14, it is possible that the regulator may do so sooner, in light of Mr. Tetangco’s recent hawkish statement.

Although some local banks may be plagued by mark-to-market hits and muted trading gains from their fixed income portfolio, we believe that most banks will benefit from a gradual and measured rise in interest rates. This should provide a leeway for margins to expand as as loan rates reprice with higher rates. The main beneficiaries would be banks with higher exposure to consumer loans.

While this should be negative for the property sector as higher mortgage rates could weigh on residential sales, the impact can be tempered by longer loan terms offered by banks and light downpayment schemes of developers. These two factors have effectively reduced monthly amortization payments which, rightly or wrongly, are viewed by some buyers as a measure of affordability. – WealthSec