September 14, 2014

BSP raises policy and SDA rates by 25 bps each

The central bank (BSP) yesterday raised the rate for overnight borrowing or reverse repurchase (RRP) facility by 25 bps to 4.0%. The BSP also increased the interest rate on the special deposit account (SDA) facility by 25 bps to 2.5%. In its statement, the BSP said that although inflation expectations are settling near the upper end of the target range, the balance of risks to the inflation outlook continues to lean toward the upside.

The regulator said that price pressures are emanating from further increases in food prices as a result of tight domestic supply conditions, as well as pending adjustments in utility rates and potential power shortages.

Considering these, the BSP deemed it necessary to respond with stronger policy action to rein in inflation expectations, even as previous monetary policy responses work their way through the economy. The BSP also believes that the continued favorable prospects for domestic demand would allow the regulator some scope for a further adjustment in policy rates.

Our take: The BSP’s policy actions were broadly in-line with consensus expectations for this year. Nonetheless, we view these actions positively in light of the recent uptick in inflation figures and the rise in inflation expectations. We also view the rate hikes as gradual moves by the regulator to drive interest rates back to normal levels, after it has maintained interest rates at all-time lows for about 1 1⁄2 years.

We expect these moves to lead to higher interest rates for bank loans, which would mean margin recovery for the sector as a whole. This bodes well for banks, as sustained loan growth with rising interest rates will have a positive effect on the core earnings of banks. – WealthSec