BSP seen to cut key interest rates

Merrill Lynch said yesterday the Bangko Sentral ng Pilipinas (BSP) may cut its key interest rates by 25 basis points (bps) in November to catch up with other central banks whose moves to ease monetary policy are intended to prevent a recession.

Once the center of the 1997 financial crisis, emerging markets — particularly in Asia — would have the critical role in stabilizing global economy this time around.

Merrill Lynch said in its Global Economics Report that in general, Asia’s policy response might need to catch up with the rest of the developed world and policies would have to be aggressive.

Backed by government guarantees, Merrill Lynch said the core global banks now look relatively safe and the global meltdown might have actually been averted.

But Merrill Lynch said Asian central banks do not have access to swap lines from the US Federal Reserve and central banks are expected to make aggressive moves in the coming months.

Merrill Lynch said central banks in the region are expected to make more aggressive intervention in the foreign exchange market to stabilize their currencies and provide dollar funds.

The BSP has actually been doing this in the last several months as the peso came under heavy pressure from equally heavy foreign exchange outflow as portfolio investors divested their holdings in Philippine securities.

Aside from its foreign exchange operations, the BSP has also opened a dollar repurchase facility that would allow banks access to short-term dollar loans using dollar ROP bonds as underlying collaterals.

This facility was intended to ease what BSP officials said was a “perceived tightness” in dollar supply.

There was also moves calling for the government to increase its guarantees on deposits and Merrill Lynch said this is also to be expected, since governments need to calm depositors as well.

In its global economics report, Merrill Lynch indicated that it expected the BSP to cut its policy rates by 25 basis points to release liquidity and protect the growth momentum.

“A global meltdown has probably been averted, but the fundamental path ahead (global recession) looks tough,” Merrill Lynch said. “Asian policy needs to turn more aggressive, to keep pace with the world’s rich countries,” it added.

Merrill Lynch said Brazil, India and China are about to be hit by the global credit crunch and the outlook for exports is “terrible” while the outlook for credit growth is cloudy.

“Yet emerging markets have some tricks up their sleeves and can help stabilize the global economy,” Merrill Lynch said.   

Specifically, Merrill Lynch said the country’s economic growth is expected to hold steady at 4.3 percent this year, with a significant slowdown to 3.1 percent in 2009.