Here's why Philippines is unlikely to cut policy rates

Analyst warns of risks.

According to DBS, the Philippines central bank (BSP) is unlikely to make any changes to either the benchmark overnight borrowing rate or the special deposit account (SDA) rate at today’s monetary policy meeting.

Here's more:

Over the past few quarters, BSP has been reducing the SDA rate, trying to encourage outflows from SDAs into other financial instruments including deposits. Stricter rules on access to the SDAs will prompt this switch in the coming months.

Meanwhile, banks should also be enticed to provide credit (to generate a higher rate of return) rather than placing funds in SDAs and generating low returns.

With inflation staying low and no concerns on external funding (the current account remains bolstered by remittance inflows even if external demand stays lackluster), monetary policy can be kept loose to maintain economic growth.

From an inflation and external stability standpoint, there is certainly room for BSP to cut rates, but we do not think this course of action to be likely. Notably, economic momentum has been very strong overthe past three quarters.

With credit growth likely to stay robust, there are overheating risks in the medium term if policy rates and SDA rates are further lowered.

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