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MANILA – The Bangko Sentral ng Pilipinas may cut its policy rates sooner than expected, according to DBS, which earlier said monetary easing can wait until next year.
“Although not our core view, the recent noticeably dovish rhetoric by the central bank suggest that risks of a rate cut are mounting,” the Singaporean lender said in a research note on Thursday.
DBS was referring to the BSP’s recent statements about the weak external economic environment and the continued inflows of foreign funds seeking to leverage on interest rate differentials, thus causing the peso to hit four-year highs against the US dollar.
“We have consistently highlighted that the authorities have leeway to respond via monetary policy if needed,” DBS said, citing the end-June inflation, which settled at the low end of the BSP’s full-year target range of three to five percent.
The central bank however has been keeping its key policy rate at 4 percent, following the faster-than-expected 6.4 percent growth in the country’s gross domestic product in the first quarter.This, along with near-zero rates in developed countries, have led foreign funds to take notice of the Philippines’ growth story, thus boosting appetite for the peso.
DBS warned that “the peso is already nearing a 15-year high and exporters may get hit by a double whammy of weak external demand and a loss of competitiveness.”
The Semiconductor and Electronics Industries of the Philippines early this month cut its export growth target to a range of 5-7 percent from an earlier estimate of 10-15 percent. Exports in the first five months grew at a 17-month high of nearly 20 percent, but electronics, which comprise at least a third of shipments, contracted.
A BSP rate cut this year can reduce interest rate differentials, making the peso less attractive to foreign funds and so tempering the local currency’s rise.
To stem the peso’s appreciation, the BSP recently reduced the interest rate on its special deposit accounts and forbade foreign funds from investing in the facility, which provides a higher yield than comparable instruments and so helps monetary authorities mop up excess liquidity.
But “these efforts may not be enough to stem speculative inflows and we think that there is an increasing chance that BSP may lower rates to reduce the attractiveness of local assets and temper peso strength. BSP may also be motivated to reduce costs stemming from the SDA,” DBS said.
The peso on Wednesday revisited four-year highs, closing at 41.68 against the greenback, raising speculation the BSP would again intervene to temper the local currency's appreciation. Its efforts to keep the foreign exchange rate stable cost the BSP some P33.69 billion in losses in 2011.
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