MANILA, Philippines – Interest rates are expected to remain at their lowest levels this year as the current market sell-off, the worst since 2008, remains manageable thanks to the country’s strong fundamentals.
On Thursday, the Bangko Sentral ng Pilipinas (BSP) kept policy rates steady at 3.5 percent and 5.5 percent for overnight borrowing and lending, respectively. It also held the rate it charges on special deposit accounts (SDA) at two percent.
Policy rates – which serve as benchmark for banks in charging their loans – have been maintained at their historic low levels since October last year, with the BSP choosing to reduce SDA rates by a total of 150 basis points earlier this year to push out more funds into the system and support economic growth.
“It’s neutral for now. It’s both hard to say at this point whether this is the end of the cuts or is just a pause at the end of the year,” BSP Governor Amando Tetangco Jr. told CNBC in a televised interview, adding that “if it is needed, we have scope to further ease.”
For analysts, the decision – which one described as a “disappointment” – was a show of strength from the BSP, which has successfully maneuvered the country from the global financial crisis five years ago to help it become Asia’s fastest growing economy now.
“There were economic reasons for the BSP to pursue another SDA reduction, but it chose to pause,” said Emilio Neri Jr., lead economist at the Bank of the Philippine Islands, in a phone interview.
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“We were disappointed because we think the BSP was distracted by what is going on in the financial markets right now,” he added.
Sharp PSEi decline
On Thursday, the Philippine Stock Exchange index (PSEi), one of the world’s best performers last year, plunged 6.75 percent, the worst drop since October 2008, a month after investment bank Lehman Brothers filed for bankruptcy.
That event triggered what is now known as the worst financial crisis since the Great Depression of the 1930s: stock markets around the globe plummeted, interest rates rose, and global economic growth were put in danger.
Now, years after the US Federal Reserve flooded the world superpower with cheap money to help it recover, the same thing is happening in the financial markets, on fears stimulus measures will be scaled back sooner than expected.
But BSP Deputy Governor Diwa Guinigundo said he does not see any reason to panic.
“I think there are built in elements in the Philippine macroeconomy to prevent what you described as a massive selloff,” Guinigundo said.
“We are confident that the US will go for an orderly withdrawal of stimulus in the US economy,” he added.
For one, Neri said the situation right now is very different from 2008. Back then, the country’s gross international reserves (GIR) were only good for roughly six months of imports, a scenario that came side by side with a weakening peso.
The problem was worsened by skyrocketing inflation that hit as much as 10.5 percent on one month, before finally settling in at 8.3 percent by December 2008.
“Oil prices back then were very high. So you have a scenario of less dollar reserves to cushion outflows, high inflation and a weak peso,” Neri said.
“The BSP had no choice but to hike rates back then. They were very fearful,” he added.
The policy rate reached as high as six percent that time, before the central bank decided to taper it off slowly beginning in December that year.
Jonathan Ravelas, chief market strategist at BDO Unibank Inc., said the “risk-off” sentiment five years ago was different from what is happening which is in fact the reverse.
“Now, the people are buying dollars on signs of recovery. This is something that is long overdue, but our fundamentals remain the same,” he said in a separate phone interview.
In addition, Ravelas said it is good that the stock market has days of correction despite the recent volatility. “Back then, markets are plummeting down to the floor, that was why the BSP was worried,” he said.
Strong fundamentals
With the GIR at almost a year of import cover, stable inflation and fast growth, Ravelas said the economy is in good position “to absorb the capital flight.”
Standard Chartered economist Jeffrey Ng said in fact, the Philippines is “still concerned about capital inflows.”
“We think that recent volatility is not a concern unless it turns more extreme, or becomes a longer-term trend,” he said in an e-mail.
Neri said the central bank will likely keep policy rates unchanged throughout the year and would likely resort to the SDA rate to maneuver. For one, the current volatility has vindicated the BSP’s decision to build up reserves at record levels.
DBS economist Eugene Leow said: “The recent bout of outflows is unlikely to place any constraints on monetary policy.”
For his part, Ravelas said as long as inflation remains manageable, at three percent as of May, the BSP has no reason to tighten interest rates. “The central bank is ahead, especially with trying to curb the peso volatility,” he said.
Always ready
If for any, the BSP has been on track of what is happening. For the past week, Tetangco has issued at least three statements, all mentioning the same thing: calm down.
“There are many options. We have to closely examine the reasons behind the volatility those larger volatilities. If there are capital outflows, we have to address that accordingly,” Guinigundo said.
Meanwhile, Tetangco said: “We continue to be watchful of market conduct…to ensure these are not excessive and that these remain consistent with overall price and financial stability objective.”
