BSP seen to keep rates steady this year

After bringing down its key interest rates to a new record low to curb speculative flows that could disrupt the country’s economic momentum, the Bangko Sentral ng Pilipinas will likely keep these rates steady during its next policy rate setting on Sept. 13.

This was the view of Bank of the Philippine Island economist Emilio Neri Jr., who was the first to make a call for a reduction in the BSP’s overnight borrowing rate by 25 basis points to an unprecedented low of 3.75 percent. His call was issued even before the BSP actually hinted about further monetary easing, which indeed was made during the latest monetary setting last Thursday.

“Going forward, the BSP (Monetary Board) could pause at 3.75 percent on their September meeting but further cuts cannot be counted out if the euro-zone debt crisis worsens or any similar event risk re-emerges,” Neri said in a research note issued late Thursday.

The BSP’s monetary easing on Thursday was the third policy rate cut for this year and was a surprise move given the consensus expectations that the local central bank would keep the rates on hold.

“This follow-through policy action makes a lot of sense,” Neri said, noting that a single quarter of above-average real GDP (gross domestic product) growth would not be enough reason for the BSP to keep its foot on the brakes. He noted that last year’s sub-4 percent GDP growth could, after all, be considered “dismal” for an economy whose population was growing at 2-2.25 percent a year.

Neri said Thursday’s move was designed primarily to temper speculative flows into the country.

“By discouraging self-fulfilling speculative flows through a rate cut, the BSP is making sure that overseas Filipinos, exporters and the BPOs (business process outsourcing) are not punished by a rapid nominal currency appreciation against it major trading partners,” Neri said.

The economist noted that the peso had posted double-digit gains against the euro.

Neri said the BSP’s policy move was also consistent with the BSP’s inflation-targeting policy framework. “It doesn’t make sense to have a two-sided target if one repeatedly breaches one side,” he said.

On the impact of this fresh interest rate, Neri said local government securities would remain constructive as market rates were likely to align with the new benchmark. (As interest rates go down, it results in capital appreciation for holders of existing bonds).

He said Philippine equities and global Philippine cash bonds (ROPs) were likely to continue outperforming their Asian emerging market counterparts as the likelihood of GDP growth outperformance in the second half of 2012 and beyond has improved.