Policy normalization through SDA rates likely in Philippines

Due to liquidity needs from banking system.

The Philippines’ central bank, Bangko Sentral ng Pilipinas (BSP), holds its monetary policy meeting this week, and since bulk of the adjustment in monetary policy has already been delivered this year, it is expected that the BSP will leave its key policy rate unchanged at 4%. According to a research note from DBS, however, further policy normalization through the Special Deposit Account (SDA) rates is likely, given the need to absorb more liquidity from the banking system.

The report said it will be interesting to monitor the tone of the policy statement. Underlying domestic growth forces remain strong, as evidenced in how core inflation has been relatively steady, if not trending slightly higher, in recent months despite headline inflation having recently peaked.

Here’s more from DBS:

Concerns over the state of the global economy, however, may prompt some caution from the central bank.

Export growth has been a key positive difference in 1H14 but there is little guarantee that things will be the same going into 2015.

Longer-term growth sustainability remains in focus, considering that investment growth has been extremely high in the past 3 years or so.

This is why the BSP will continue to monitor liquidity growth in the financial system. At the same time though, the main reason for the string of rate hikes this year is to make policy adjustments from a position of strength.

The BSP is unlikely to go all-out at this juncture, particularly since there are now doubts over fiscal policy outlook going into 2015.