25 basis points cut in Philippine central bank’s policy rates

By Joann Santiago

Banking giant HSBC projects Philippine monetary officials to enforce another 25 basis points cut in the central bank’s policy rates Thursday on capital inflows concerns.

HSBC economist Trinh D Nguyen, in a report, said inflation continued to be benign but capital flows remained strong, which in turn impact on sterilization cost for the central bank.

“While we think a rate cut will be ineffective at stemming inflows, as these tend to be drawn by strong fundamentals, BSP’s inclination will still be to do what it can (to lessen the robust capital flows to the country,” it said.

Central bank’s policy-making Monetary Board has slashed the Bangko Sentral ng Pilipinas’ (BSP) policy rates by a total of 75 basis points, at 25 basis points each last January, March and July.

To date, the overnight borrowing or reverse repurchase (RRP) rate is at record-low of 3.75 percent and the overnight lending or repurchase (RP) rate is at 5.75 percent.

The Board will have its seventh policy rate setting for the year Thursday this week and it is widely expected to further slash the central bank’s policy rates.

“Should the BSP cut rates, this would be the end of the easing cycle, as inflation will likely rise in first half of 2013 to the top of the BSP’s three to five percent target,” the report said.

It, however, warned that “keeping interest rates at a record low, especially in an above-trend growth environment, also risks creating asset bubbles.”

Monetary officials maintain that there is still no misalignment in the country’s asset market but stressed that the central bank will undertake preemptive measures against any possible asset price bubbles.

Relatively, international macroeconomic and political consulting firm Global Source said a rate cut this week “will continue to be motivated by monetary authorities’ concern for excessive peso appreciation and the impact on the BSP balance sheet of having to sterilize foreign exchange interventions.”

In a report, Global Source noted that “following recent pronouncements of more quantitative easing in the U.S., the Eurozone and Japan, emerging markets have one by one lowered interest rates mainly to stem capital inflows and protect exports from further currency gains.”

For one, the robust capital flows have resulted in new record highs for the Philippine peso and the local bourse this month, it said.

The report said that net foreign buying in the local stock market amounted to about US$ 1.9 billion as of mid-October this year, or an expansion of over 40 percent than the full-year level in 2011.

“A decision to cut policy rates at this time should also be made easier by softening world commodity price increases,” it said.

It also cited BSP Governor Amando Tetangco Jr.’s statement of the central bank’s readiness to use other tools, not just the policy rate, in addressing excessive exchange rate volatility.

It pointed out that “while the BSP would like to see banks pass on lower rates to borrowers, it is at the same time using “calibrated signals” via more extensive reportorial demands on banks (e.g., more comprehensive coverage of real estate financing activities, disclosure of NPLs net of specific allowance for credit losses) to show readiness to, among other measures, adjust prudential limits if needed.”

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