Rate cuts in the Philippines seen as premature

DBS believes rate cuts in the Philippines may be premature and the central bank will keep the overnight borrowing rate steady at the upcoming monetary policy meeting.

DBS Group Research noted:

Although not our core view, there are increasing risks that the central bank (BSP) will cut rates in the coming months. BSP has sounded a dovish stance in recent weeks and reiterated concerns about excessive inflows and the strength of the peso.

It has also taken steps to restrict foreign funds from accessing its special deposit account (SDA, used to mop up liquidity in the financial system).

With inflation hugging the lower band of BSP’s targeted 3-5% range, the authority has significant leeway to lower the overnight borrowing rate (OPR) from the current 4%. By reducing the policy rate, the lower returns should dampen the inflow of foreign portfolio funds and prevent excessive currency strength.

It is also a form of insurance against a slowing global economy by maintaining export competitiveness and bolstering domestic demand.

Alternatively, the authorities may also be considering soft forms of capital controls to cope with fund inflows. By dampening inflows, the authorities could reduce the magnitude of destabilizing outflows during times of risk aversion.

For now, we believe that rate cuts may be premature and BSP will keep the OPR steady at the upcoming monetary policy meeting on Thursday.