BSP rates may remain at record lows
Monetary officials are under less pressure to hike interest rates this year as the economy benefits from robust growth in dollar income from remittances and other industries, according to Singapore’s DBS, Southeast Asia’s biggest financial institution.
This should avert the risk of a foreign exchange shortfall that the country’s peers are now facing.
DBS this week said the Philippines was an “exception amongst Asia economies over the past year.”
“Bond yields (are) staying range bound despite upward pressure from rising US treasury yields,” it said in a recent report.
DBS noted that Philippine government debt yields had risen less than similarly rated peers relative to US treasuries, which are used as the benchmark for pricing all sovereign debt instruments.
DBS said the Bangko Sentral ng Pilipinas (BSP) would likely wait until the second half of the year before hiking its benchmark overnight borrowing and lending rates, which currently stand at record lows of 3.5 and 5.5 percent, respectively.
“With the current account projected to remain in a firm surplus, upward pressure on short-term rates and bond yields are likely to come only when rising inflation prompts rate hike speculation,” DBS said in its report.
BSP Deputy Governor Diwa C. Guinigundo earlier this week said inflation for the year might fall below the current forecast of 4.5 percent due to delays in the implementation of higher power rates in Metro Manila.
This would give the BSP’s policy-making Monetary Board the luxury of keeping interest rates at their current levels to continue supporting economic growth.
Guinigundo on Tuesday said inflation was still expected to settle well within the BSP’s target range of 3 to 5 percent for the year. Last year, inflation averaged at 3 percent, at the low end of the BSP’s target range.
DBS said the economy’s robust foreign exchange income supported the country’s image as a safe investment destination. Remittances from overseas Filipino workers likely rose by more than the official growth target of 5 percent last year.
The BSP expects remittances to grow by another 5 percent in 2014.
These inflows help keep the peso firm against the dollar. A weaker peso would push up the cost of imported goods such as fuel and food, resulting in higher inflation.
In the meantime, the Philippine government last week issued $1.5 billion worth of 10-year ROPs (Republic of the Philippines) or global bonds.
The issuance fetched a yield that was 1.75 percentage points less than a similar issuance by the similarly rated Indonesia, reflecting the difference in the perception of investors between the two countries.
Other emerging markets now face the possibility of a shortage in foreign exchange, which economies need to pay for dollar-denominated debts and other expenses, due to the US Federal Reserve’s plan to slow down and eventually stop its massive bond-buying program.
The halt in the Fed’s quantitative easing, wherein it buys $85 billion worth of US treasuries and mortgage-backed securities every month to keep interest rates low, has pushed investors to emerging markets in search of higher yields.
Last month, the Fed said it would cut its purchases by $10 billion starting January as the US economy shows more signs of recovery.
A shortage of foreign exchange, referred to as a balance-of-payments crisis, would weaken currencies and force monetary authorities to hike interest rates to attract more foreign capital and stem inflation.
