Think-tank says BSP likely to cut rates

MANILA, Philippines - New York-based Global Source said the Bangko Sentral ng Pilipinas (BSP) may cut rates on Thursday, mainly to ease the exchange rate volatility and on the back of easing inflation.

“Monetary authorities may take advantage of low inflation expectations and the fact that the global economy continues to weaken to cut rates as early as the next rate-setting meeting on Thursday,” Global Source said.

It said the pressure on the peso and other emerging market currencies to appreciate may continue as investors look away from the United States and Europe, which is still in a crisis.

However, the think-tank said the move of the Bangko Sentral ng Pilipinas (BSP) to rid its so-called Special Depositor Accounts of foreign funds is reasonable.

While some analysts believe that the BSP’s move may not be enough to quell speculative capital, Global Source said in its latest report that monetary authorities have done the right thing.

“On the whole, the latest policy move seems reasonable, in our view. SDAs were explicitly designed to siphon excess domestic liquidity, and allowing these instruments to be the object of arbitrage play by foreign funds – their yields are not only higher than key foreign interest rates but also better than returns to Philippine government securities – defeats the stated purpose and needlessly raises the BSP’s sterilization costs,” Global Source said in its report.

The report noted that at best, the policy has sent a signal that monetary authorities would not allow the peso to appreciate too much against the dollar.

However, the report said that the BSP has yet to determine the success of the new policy.

“Of course, actual success of the policy remains to be seen and will depend on how far the BSP is willing to go to enforce it. At any rate, a strong signal has been sent that monetary authorities will not allow the domestic currency to strengthen by very much,” Global Source said.

It said the BSP may also hike reserve requirements to accompany the policy rate cut especially if inflationary pressures, including on assets driven by the flood of liquidity and low interest rates, threaten to build.