By Julito G. Rada
Hongkong and Shanghai Banking Corp. said Wednesday the liquid domestic financial system is giving the Bangko Sentral ng Pilipinas room to hike interest rates further in the next two policy meetings.
“Indicators suggest that the banking system in the Philippines remains sound and liquid for now… giving the BSP some room to raise rates further to address core inflation that is currently the highest since 1999,” HSBC said in a report.
“Despite global concerns on financial stability, we expect the BSP to hike by 25bp [basis points] this week and at the next meeting in May,” HSBC said, referring to the collapse of big banks in the United States that observers feared could affect global financial markets.
HSBC said the “job’s not finished for monetary policy” in the Philippines despite headline inflation easing to 8.6 percent in February from a 14-month high of 8.7 percent in January.
Core inflation—which better represents the underlying trend of inflation—accelerated to 7.8 percent year-on-year in February, the highest since 1999.
“Moreover, despite the global headlines regarding Silicon Valley Bank and Credit Suisse, we still expect the BSP to hike by 25bp to 6.50 percent at the following Monetary Board meeting on the 18th of May. This is because the Philippine financial system remains sound for now, despite the aggressive pace of rate hikes over the past 10 months,” HSBC said.
HSBC said the financial system is still liquid given that the amount of bank funds parked with the BSP—-an indicator of excess liquidity—-is higher than pre-pandemic levels.
It said when comparing the CDS (credit default swap) spreads now to when the peso reached an all-time-low of 59 against the greenback October of last year, it could be seen that despite having increased over the past few days, they are still below their third quarter 2022 levels.
HSBC said some degree of caution was needed although the risk of financial sector instability in the Philippines seemed minimal for now.