As the rate on the 90-day T-bill dropped to a record low, the interest rate differential between the US and Philippine rates fell back into the negative zone.
But according to the Bangko Sentral ng Pilipinas (BSP), however, this was not a new phenomenon since the negative differential also happened last year when domestic T-bill rates dropped back to five percent.
Despite the negative differential, however, BSP Governor Amando M. Tetangco Jr. said capital flows, including those going to the government bond market, continued to be strong.
"The country has remained positive due to sound economic fundamentals," Tetangco said. "We are hopeful that the low domestic interest rates would support the continuation of the pick-up in credit growth that would contribute to greater economic activity."
Tetangco said the BSP is "monitoring" the movements in interest rates "to ensure that these do not adversely affect investor appetite."
"Negative real interest rates may not be consistent with sustainable savings and investment conditions," he said.
The BSP said despite the negative interest rate differential, inflows into the country appeared unhampered, particularly into the equities market and even foreign direct investments.
"The market has recognized that even if the interest rate differential is negative, the market risks are low now and the possibility of making money still remains," said Tetangco.
He expressed optimism that the interest rate on the 90-day T-bills would eventually correct although he said it is impossible to tell how long it would take the market to get around to it.
"There is no way you can tell," he said. "But if the negative interest rate differential is prolonged, that is not sustainable. An open market always corrects eventually."
The average rates on the benchmark T-bills dropped to a new all-time low on Monday as excess liquidity washed over the market already upbeat over economic prospects this year amid declining government borrowing.
The average rate 91-day T-bills fell from 4.555 percent during the last Auction in December to 3.795 percent — the lowest rate ever recorded.