The Bangko Sentral ng Pilipinas is widely expected to keep policy rates unchanged on Thursday considering that further rate cuts may not be good for the domestic economy, according to the DBS Group.
Policy interest rates are up on the Monetary Board’s agenda in its meeting this afternoon.
DBS said in a new research note that in the immediate term, the central bank was less concerned about inflation than about the situation of capital inflows which—in the first place—was what prompted a 25-basis-point reduction in the monetary agency’s policy rates last October.
That most recent move brought the overnight borrowing rate to a record low of 3.5 percent and the overnight lending rate to 5.5 percent. Since the start of the year, monetary authorities have cut each rate by a total of 100 basis points.
“Further rate cuts may risk domestic macroeconomic stability further down the line,” DBS said. “With headline inflation still staying benign, BSP can keep rates accommodative, but further rate cuts appear unlikely.”
The Singapore-based group noted that the BSP has considered several new measures to help moderate capital inflows and temper the peso’s strength.
“These include curbs on NDFs (or non-deliverable forwards) and setting a minimum holding period for securities,” the bank said. NDFs are popular among investors seeking to mitigate possible losses on foreign currencies that are thinly traded or are not convertible to other currencies.
DBS said that no policy rate changes were also expected over the next four quarters.
The bank said that a rate increase of 25 basis points, instead of a reduction, could be seen in the fourth quarter of 2013. This is a revision of a previous forecast of such move in the third quarter next year.
DBS said that the series of policy rate cuts this year was possible because inflation stayed very low. Inflation figures have been easing progressively in the past few months, settling at 2.8 percent year on year in November. This put the January-November average to 3.2 percent, near the lower end of the central bank’s target range of 3 to 5 percent, data from the National Statistics Office showed.