UBS says BSP at end of rate-cutting cycle

The Bangko Sentral ng Pilipinas may hold policy rates steady until the end of the year as it may have already reached the end of its interest rate-reduction cycle, says UBS.

UBS also said the central bank was likely to implement additional measures to prevent an asset bubble.

In its latest report on the Philippines, the international investment bank said that with economic growth coming in as expected, the BSP was now likely to focus more on ensuring price stability rather than on accelerating economic growth.

“The governor [Amando Tetangco Jr. of the BSP] said the [Bangko Sentral] would review its policy stance to take into account accelerating government spending, weaker external demand, and further improvements in market sentiment toward peso assets,” UBS said in the report written by its economist, Edward Teather.

“We interpret this, and a comment on the breadth of the central bank’s toolkit, to mean that the central bank intends to make further use of macro prudential measures rather than policy rate adjustments in the immediate future,” UBS added.

The BSP has cut its key policy rates three times this year to historic lows of 3.75 percent for overnight borrowing and 5.75 percent for overnight lending.

The move has influenced a reduction in commercial lending rates.

The rate cuts were meant to boost growth of the economy after its slowdown last year.

The economy has indeed grown faster so far this year, registering a 6.1-percent expansion in its gross domestic product in the first semester from a year ago.

This keeps the full-year growth target of 5 to 6 percent attainable.

Given the latest economic developments, UBS said, the BSP was now concerned with rising asset prices, which economists said could lead to a bubble without appropriate regulation.

It said the BSP may be poised to implement measures against asset price bubble—or the speculative increase in the prices of assets—on top of that issued recently.

Last month, the BSP announced it was putting more limits on real estate loans by banks to help ensure the economy avoids a bubble in the property sector.

In particular, the BSP has included individual housing loans, loans to developers of socialized houses, and investments of banks in securities issued by property firms in the computation of “real estate exposure” of banks.

Under BSP rules, banks must limit their real estate exposure to a maximum of 20 percent of their loan portfolio.

Previously, only loans to developers of commercial and residential properties are covered by the 20-percent limit.

Meantime, UBS said the Philippine peso is expected to end the year at the relatively strong 42-to-a-dollar territory amid projections that the economy can sustain a respectable economic growth rate.