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Impact on monetary policy of the rising interest rate differentials

Barclays Capital does not see any increase in the Bangko Sentral ng Pilipinas (BSP)rate until the second half of 2010 due to the the benign inflation environment in the country.

Barclays Capital regional economist Prakriti Sofat, in a report released Friday, said the central bank was worried about the impact on monetary policy of the rising interest rate differentials between the domestic economy and the rest of the world.

“We believe that any rate normalization will probably materialize in H2 2011, with inflation and external developments being the key factors to watch,” the report said.

Central bank’s policy rates have been at record-low since July 2009 after the policy-making Monetary Board (MB) noted the resiliency of the domestic economy that accompanied the continued deceleration of rate of price increases in the country.

To date, BSP’s overnight borrowing or reverse repurchase (RRP) facility rate is at four percent while the overnight lending or reverse repurchase (RP) facility rate is at six percent.

However, interest rates in major economies are at nearly zero percent. The US, for one, is at 0.25 percent and the US’ Federal Reserve has not immediate plan to hike this on account of the lethargic recovery of the world’s biggest economy.

“The main risk we see to our forecast comes from a commodity price shock, especially food and oil,” the report said.

Last October, food inflation, which accounts to around 50 percent of the country’s consumer price index (CPI) basket, slowed to two percent year-on-year from the previous month’s 3.2 percent as supply remains adequate amid weather-related disturbances.

Also, inflation rate in the fuel, light and water (FLW) index dropped to 8.3 percent from last September’s 11.9 percent.

Barclays said utilities costs in the country went down for the second month in a row last October to 8.3 percent from 12 percent in October last year ”given lower production costs as well as contained oil prices.”

With the continued easing in the country’s inflation rate, Barclays forecast it to average at 3.7 percent, which is near the lower end of the government’s 3.5-5.5 percent target for this year.

Next year, the investment bank sees higher food prices “especially given the rise in international food commodity prices.”

It, however, noted that “fuel-related costs will continue to serve as a dampening factor.”

“With the output gap only flipping into positive in Q1 2011, core price pressures are expected to remain relatively contained,” the report said.

“Overall we expect inflation to average 3-3.5 percent in 2011, which is towards the lower end of the central bank’s target range of five to five percent,” it said. (PNA)

Lazada Philippines

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