BSP seen to hold off further rate cut

MANILA, Philippines - Monetary authorities could hold off from further easing policy rates later this week as growth momentum was sustained in the third quarter amid low inflation, analysts said.

Six of seven bankers and analysts polled by The STAR expect the Bangko Sentral ng Pilipinas’ (BSP) Monetary Board to keep key rates unchanged once it meets for the last time this year on Thursday.

Rates have been slashed four times this year –  on January, March, July and October – to bring them to new record-lows of 3.5 percent for overnight borrowing and 5.5 percent for overnight lending.

“There could be no change with good GDP (gross domestic product) and low inflation,” said Alvin Ang, president of the Philippine Economic Society, in a text message.

Manuel Andres Goseco, senior vice president of Eastwest Banking Corp., and Raul Victor Tan, senior vice president for the treasury group of Rizal Commercial Banking Corp., agreed.

Jonathan Ravelas, chief market strategist at BDO Unibank Inc., said “policy appears appropriate” to support growth and keep inflation in check until the end of the year.

Growth hit 7.1 percent in the third quarter, beating market expectations to become the fastest in Southeast Asia. This brought the average economic expansion for the first three quarters to 6.5 percent.

GDP is the sum of all products created and services rendered in an economy. The government has targeted GDP growth to hit five- to six-percent this year, although it acknowledged it may surpass that given the stellar third-quarter performance.

Inflation, on the other hand, slowed to an eight-month low of 2.8 percent in November, keeping the year-to-date average at 3.2 percent. The latter is within the low end of the BSP’s three- to five-percent target for the year.

“Further monetary easing does not appear likely this week,” said DBS economist Eugene Leow, noting price pressures are “likely to build” in the coming months as growth accelerates.

HSBC economist Trinh Nguyen, in a phone interview, agreed, saying there is “unfavorable base effect on price pressures” next year, thus could prompt BSP to be cautious on cutting rates again.

For her part, Prakriti Sofat, regional economist at Barclays Capital, said capital flows would take center stage at the next policy meeting. She said BSP would likely resort to macroprudential measures to temper the peso’s appreciation.

“In our opinion, the central bank cut the policy rate 25 (basis points) in July and October to reduce interest rate differentials in an effort to temper the pace of (peso) appreciation. However, this was not successful,” Sofat explained in an e-mail.

BSP Governor Amando Tetangco Jr. said last week talks are ongoing between regulators and the industry on the possibility of putting a cap on non-deliverable forward (NDF) transactions. There were fears NDFs are attracting speculative inflows which are betting for more peso appreciation in the future.

A strong peso, which closed at P40.945 to a dollar on Friday, trims the value of dollar export earnings and remittances from overseas Filipinos.

But for Victor Abola, senior economist at the University of Asia and the Pacific, BSP relying on other measures versus capital flows “does not preclude” another 25-basis-point rate cut next meeting.

“There is an urgent need to tame the appreciation of the peso,” Abola said.