BSP seen further cutting policy rates
DESPITE recent hints of an ending “dovish” or monetary easing cycle, the Bangko Sentral ng Pilipinas may slash interest rates one more time to curb a sharp peso appreciation and temper speculative capital flows, Citibank’s chief Asia-Pacific economist said.
“The BSP had already used opportunities of a strong risk-on environment to cut rates amidst still robust growth. In the wake of QE3 (US Federal Reserve’s third round of quantitative easing), we’ve seen statements by the BSP warning the use of more macro prudential tools to manage capital flows, but if inflation were to moderate in the coming months, we wouldn’t rule out a greater incentive for one more rate cut,” Hong Kong-based Filipina Johanna Chua, who is Citi’s managing director, said in a briefing on Tuesday.
The Harvard-educated Chua said the BSP might slash key interests by another 25 basis points or pursue other measures like a reduction in the reserve requirement on banks or the release of funds locked up in special deposit accounts.
The BSP’s overnight borrowing rate is at the record low of 3.75 percent.
Chua said the US Fed’s QE3—a system of bond buybacks meant to boost liquidity without having to lower the targeted interest rate which was now at near-zero level —hada powerful impact on Asian markets because it was sanctioned at a time that growth risks in Asia were far higher compared to previous QE episodes.
“With a more positive risk tone and prolonged low rates, capital inflows could be particularly strong in countries with strong fundamentals and higher yields,” Chua said.
She said the BSP would likely cap any significant local currency appreciation, explaining that “tolerance” for foreign exchange outperformance would be lower this time because of weaker growth and exports prospects.
Monetary easing was thus seen as a way of dealing with capital inflows in lieu of capital controls, she said.
The economist added that the Philippines must figure out a way to liberalize “to get some of the money out,” noting that a lot of regulations were designed in the past when the country was facing dollar shortfalls.
“If anything, the Philippines has almost excessive reserves,” she said, noting this was a “symptom of success” but also of “over conservative balance sheet management.”
The country’s gross international reserves (GIR) of about $80 billion have—for the first time in history—exceeded the foreign debt stock of about $62.5 billion as of end-June. The government has turned from a long-time net borrower into an international lender, recently contributing $1 billion of its GIR to the International Monetary Fund’s funding pool to help the debt-strapped euro-zone.
The Philippines must ensure efficient use of capital inflows, she said. In general, how central banks would respond to QE3 would depend on several factors, one of which was to what extent this could fuel liquidity-driven credit boom or asset price risks, she added.
In the case of the Philippines, she said: “I still think there’s a sense that we don’t have any widespread asset bubble yet.”
Southeast Asia recently saw an investment revival and Chua said she was hoping this would benefit the Philippines’ manufacturing sector.