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MANILA – The Bangko Sentral ng Pilipinas is likely to keep steady its key interest rates when its policy-making Monetary Board meets on Thursday, DBS said on Monday.
In a research note, DBS said risks are mounting for a rate cut “in the coming months,” citing the BSP’s “dovish stance in recent weeks” given strong foreign portfolio inflows and the resulting sharp appreciation of the peso.
The central bank recently cut the interest rate on its special deposit accounts and banned foreign fund placements amid reports that they were tapping into the facility to take advantage of interest-rate differentials. Interest rates in advanced economies are near zero, whereas the SDA offers a steady rate upwards of four percent.
The surge in portfolio inflows has pushed up the peso to four-year highs as a result, raising concern that the local currency’s sharp appreciation would exacerbate the exports slowdown caused by the weakness in global demand.
Exports grew by nearly 20 percent in May, but the country’s key exports – electronics – contracted. The electronics industry already trimmed its growth forecast to a range of 5-7 percent from an earlier estimate of 10-15 percent.
Despite the Philippines’ faster-than-expected 6.4 percent economic expansion in the first quarter, inflation has remained at the low-end of the BSP’s full-year target range of three to five percent, thus providing monetary authorities some elbowroom to ease policy, which in turn can help temper portfolio inflows and the peso’s rise.
“It is also a form of insurance against a slowing global economy by maintaining export competitiveness and bolstering domestic demand. Alternatively, the authorities may also be considering soft forms of capital controls to cope with fund inflows. By dampening inflows, the authorities could reduce the magnitude of destabilizing outflows during times of risk aversion,” DBS said.
Even with mounting risks of a rate cut, “we believe that rate cuts may be premature and BSP will keep the OPR steady at the upcoming monetary policy meeting on Thursday,” DBS said.
The BSP’s overnight policy rate has stayed at a record low of four percent since early this year.
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