Monetary conditions facing the Philippines 'unique' compared to peers

Despite risk aversion, the peso has remained strong and is the best performing currency in Asia this year, says DBS.

DBS Group Research noted:

Despite recent dovish rhetoric, the central bank (BSP) is still expected to keep the overnight borrowing rate steady at 4% today. The monetary conditions facing the country are unique compared to its peers in the region.

Against a backdrop of slow global growth, the economy has performed well and domestic demand look likely to cushion further falls in external demand in the coming months. Despite risk aversion, the peso has remained strong and is the best performing currency in Asia this year.

This means that in contrast to other central banks, there is no urgency for BSP to cut rates and support the economy just yet. Moreover, monetary policy is already very accommodative and interest rates are low.

The 2-year government bond yield is at 3% while the 10-year is close to 5%. Meanwhile, 3-month phibor has dipped below 2%.

However, there is a more compelling case if we consider that the peso’s strength, caused in part by speculative inflows, may be eroding competitiveness in a difficult global environment. Over the last few weeks, the rule changes to the special deposit account (SDA) and the lowering of interest rates for different tenors of the SDA clearly indicate that BSP is trying to clamp down on speculation.

A lower overnight borrowing rate could reduce the attractiveness of Philippine assets to foreign investors. With the average monthly YoY inflation thus far only at 3% (the bottom of the 3-5% target set by BSP), there is certainly ample room to further cut rates if needed.

Other options such as soft forms of capital controls or a further lowering of SDA rates could also be considered to help reduce capital inflows. At this point, although risks are building towards more monetary easing in the coming months, we still think that a rate cut today may be premature.