Most of the Asian countries have kept their interest rates at the same level this year. The Philippines central bank has followed the same course and has kept its key interest rates unchanged yet again.
The Recent Central Bank Action
The Bangko Sentral ng Pilipinas (BSP), or the Philippines central bank, has kept its benchmark interest rates unaltered at a record level. Along with reserve requirement ratios, the BSP has kept the overnight borrowing and lending rates constant at 3.5% and 5% respectively.
However, the BSP has raised the Special Deposit Account (SDA) facility rate – the rate it pays on special deposit accounts – by 25 basis points to 2.25% in order to curb liquidity, which might add to inflationary pressure.
Moreover, the central bank expects higher inflation this year on account of risks from El Nino, increasing food prices and a likely up-tick in power prices. It now expects prices to grow by 4.4%, up from its earlier expectation of 4.3% and above the mid-point of the 3%–5% target. Also, the central bank expects inflation to be 3.7% in 2015, near the top end of its target of 2%–4%.
Some economists believe that the recent move by the central bank to hike the SDA rate is an early indication that it might eventually hike key policy rates in its forthcoming meeting.
This might indeed materialize, given the fact that prices rose by 4.5% in May – the fastest pace in two and a half years. The bank has already hiked the reserve requirement ratio by a total of 2% during its last two policy meetings in order to tone down liquidity growth, which exceeded 30% in April.
Moreover, after a weak first quarter wherein Q1 GDP grew at a lesser-than-expected rate of 5.7% year over year, the Philippine economy is expected grow faster in the second quarter with its President Benigno Aquino confident that the economy would be able to hit the 6.5–7.5% growth target (read: Philippines ETF in Focus on Slowing Economy).
Part of the confidence stems from the fact that the government is expected to increase infrastructure spending to record levels this year and the export sector is expected to get a boost from economic recovery in the U.S. and the Euro zone.
If the economy really expands at a faster rate this quarter, it will add to the already strong inflationary pressure. “A rate hike can’t be too far away if growth indicators improve,” says Jonathan Cavenagh, senior FX strategist with Westpac in Singapore.
The Philippines equity markets are currently in a party mood, though they might soon show some corrections if the problem with high inflation refuses to go away. Moreover, most of the market experts believe that the Philippine equity markets are expensive at current levels relative to other markets in the region.
The lurking fear of a rate hike in the near future should caution investors towards iShares MSCI Philippines Investable Market Index (NYSEARCA:EPHE) – the only pure play ETF focused on the nation. In fact, the fund has already seen outflows worth $11 million in the past two months as per ETF.com.