Interest rates may hit new lows

MANILA, Philippines - Policy rates could reach new historic lows this week as the Bangko Sentral ng Pilipinas (BSP) looks at boosting exports and taming peso’s strength, analysts said.

All eight analysts polled by The STAR said BSP’s policy-making Monetary Board could slash interest rates by another 25 basis points to 3.5 percent and 5.5 percent for overnight borrowing and lending rates, respectively.

Such will be the fourth cut for the year, and will mean a one-percent decline in interest rates since January, if it happens this Thursday.

“BSP should cut policy interest rates by 25 basis points. The increased inflow of hot money has resulted in the rapid appreciation of the peso,” said Benjamin Diokno, a former Budget secretary.

“The strong peso is the single most serious threat to sustainable, inclusive growth based on manufacturing and exports,” added Diokno, who is now senior economist at the University of the Philippines-Diliman.

Emilio Neri, economist at the Bank of the Philippine Islands, agreed, saying: “It has been a little overdone for the peso. It has now become a big issue for the BSP.”

By cutting rates, BSP hopes to discourage yield-seeking inflows from entering the country, which in turn, will help tame the peso. The local currency, which closed at 41.39 to a dollar on Friday, has appreciated by roughly six percent since the last trading day of 2011.

A strong peso, while making imports cheaper, also trims the value of dollar export earnings and remittances from overseas Filipino workers, affecting their purchasing power. Latest data showed merchandise exports unexpectedly dropped nine percent in August.

“A rate cut this week would be preemptive of further weakness in the export sector in the coming months,” DBS Ltd. economist Eugene Leow said in an e-mail.

Furthermore, Victor Abola, senior economist at the University of Asia and the Pacific, said BSP has a wide space to make a rate cut given manageable inflation at 3.2 percent as of the third quarter.

“They will become more comfortable to cut rates given that inflation is actually slowing down,” Abola said in a phone interview. BSP is targeting inflation to hit three- to five-percent this year.

Prakriti Sofat, regional economist at Barclays Capital, said a rate cut is possible given “dovish comments” from BSP Governor Amando Tetangco Jr.

Last Friday, Tetangco said BSP “will not tolerate excesses in exchange rate movements and will not hesitate to consider other tools in our policy toolkit.”

“Governor Tetangco said further easing cannot be ruled out if the need arises given unfavorable global growth prospects. He added that a rate cut would help to manage capital inflows,” Sofat said.