Philippines Refrains From Rate Cut to Support Peso
The Philippine central bank refrained from cutting its benchmark interest rate on concern lower borrowing costs would weaken the peso and fan inflation.
Bangko Sentral ng Pilipinas maintained the rate it pays banks for overnight deposits at 6 percent for a second month today, Governor Amando Tetangco told reporters in Manila. The decision was predicted by 7 of 16 economists in a Bloomberg News survey. Nine expected the bank to lower the benchmark.
“Rising readings on core inflation suggest there are still price pressures in the pipeline,'' Tetangco said. “Sources of upside inflation risk remain, including volatility in the foreign-exchange market.''
Bangko Sentral has reduced the amount of deposits it requires banks to hold in reserve, approved a dollar-lending facility and raised the amount banks can borrow from it to boost liquidity, rather than join counterparts in India and China in cutting interest rates to sustain growth amid a global recession. Those measures are adequate for the economy, Tetangco said today.
“The central bank is more concerned about the exchange rate so I think any rate cut may happen in January unless major economies slow further and drastically,'' said Joric Nazario, treasurer at Philippine Veterans Bank in Manila.
Peso Falls
The peso fell 0.2 percent today to a two-year low of 49.999 against the dollar. It's declined 17 percent this year, set for the biggest drop since 2000, shortly before former President Joseph Estrada was ousted from office by a popular revolt in January 2001.
“Reducing policy rates would affect capital flows,'' Deputy Governor Diwa Guinigundo said today cash in 1 hour. Keeping the rate steady “will prevent additional volatility in the foreign- exchange market.''
The peso's drop is eroding the value of local assets and threatening to swell the nation's $33 billion foreign-currency obligations. Foreign investment in stocks and bonds posted a net outflow of $911.5 million in the ten months to October compared to a net inflow of $3.7 billion in the same period a year ago, data from the central bank showed.
Remittances from overseas nationals this quarter will boost the supply of dollars and support the peso, Guinigundo said.
Bangko Sentral had raised interest rates three times since early June to damp inflation that accelerated to a 16-year high in August, before halting last month. Consumer-price gains have slowed to 11.2 percent in October and may fall below 10 percent next month, Tetangco said yesterday.
Flexibility to Review
“If the upside risks start to retreat next month or in 2009, there's a flexibility to review'' the policy stance, Guinigundo said today. Still, possible increases in government wages may be a risk to inflation, he said.
Expansion in the Southeast Asian nation may slow to an eight-year low of 3.5 percent next year while average inflation will likely ease to 6 percent, the International Monetary Fund said last week.