‘Yolanda’ may keep interest rates low

The Bangko Sentral ng Pilipinas (BSP) is expected to keep interest rates at record lows for much longer than initially thought, following the damage brought by Supertyphoon Yolanda, which may prompt policymakers to be more accommodative of growth.

In separate notes this week, Singapore’s DBS and British banking giant Barclays Plc said while the full extent of the supertyphoon’s impact on the economy has yet to be assessed, most signs show that the hit may be significant.

“Two of the worst affected provinces are both in the low-lying Eastern Visayas region. This region is largely agricultural. Cebu, in Central Visayas, was also affected and this is an important center for outsourcing operations,” DBS said on Wednesday.

“The economic impact from Yolanda (international code name “Haiyan”) is likely to be quite material,” it said.

The typhoon, DBS said, threatens to derail strong momentum the Philippine economy has experienced since last year. In 2012, the Philippine economy grew by 6.8 percent. This year, most estimates also showed that the country may beat the government’s growth target of 7 percent.

In its report, DBS noted that estimates from various groups showed that the damage brought by Yolanda may reach $15 billion. Brunt of this damage was likely suffered by the country’s agriculture sector, which employs a third of the local workforce.

DBS said the government is expected to increase its spending following the typhoon, but even reconstruction efforts may face complications due to the lack of insurance coverage for many establishments and homes in the affected areas.

“On the monetary policy front, the BSP may now be less keen to raise its interest rates next year, as we have previously expected,” DBS said.

In its own report, Barclays said the BSP may keep its policy rates at their current record lows until the third quarter of next year.

“We expect the central bank to look through any supply-side disruptions related boost to inflation, given that inflation expectations remain well anchored,” Barclays said.