Rate cut risks up in the Philippines

There are increased risks of a rate cut to reduce the attractiveness of local assets and temper peso strength, says DBS.

DBS Group Research noted:

Although not our core view, the recent noticeably dovish rhetoric by the central bank (BSP) suggest that risks of a rate cut are mounting. We have consistently highlighted that the authorities have leeway to respond via monetary policy if needed.

With average YoY inflation for the first six months of this year at just 3%, full-year inflation is likely to be at the low end of BSP's target range of 3-5%. Lower rates can serve as additional insurance to support domestic demand in a difficult global economic environment. Moreover, cutting rates may reduce speculative inflows and prevent excessive currency strength.

On a real effective exchange rate basis, the peso is already nearing a 15-year high and exporters may get hit by a double whammy of weak external demand and a loss of competitiveness. BSP has already taken steps to reduce speculative inflows by restricting foreign funds from investing into its special deposit account (SDA, an instrument used to mop up excess liquidity).

This was followed up a small reduction in the interest rates for SDAs and a separate announcement that banks which do not comply with the new rulings (on foreign funds) will be denied access to the SDA. These efforts may not be enough to stem speculative inflows and we think that there is an increasing chance that BSP may lower rates to reduce the attractiveness of local assets and temper peso strength. BSP may also be motivated to reduce costs stemming from the SDA.