The Philippine central bank will likely stand pat on interest rates at its meeting on Thursday, a Reuters poll showed, but will probably cut its special deposit account (SDA) rate for the third time in a row to support growth and contain the peso's strength.
All 12 economists polled by Reuters said the Bangko Sentral ng Pilipinas (BSP) would keep its main policy rate steady at a record low of 3.5 percent, and most of them forecast a 50-basis-point cut in the short-term special deposit account rate. "Even though the peso has depreciated over the past month most trade bodies consider the level to be still too high," said Vaninder Singh, economist at Royal Bank of Scotland (RBS) in Singapore.
The central bank has lowered the SDA rate by more than 150 basis points since July 2012. The impact of the cuts, however, has yet to be felt with money parked with the SDA window at 1.93 trillion pesos ($46.7 billion) in the week ending April 5, just slightly down from a record 1.95 trillion pesos in the week ending March 15.
Reducing the SDA rate further is expected to discourage dollar inflows and dampen the peso's rise and divert funds to the real sector to boost economic activity. A 50-basis-point cut will bring the rate to 2.0 percent, which is still higher than the rates on bank deposits and short-term government securities. The BSP has spent billions of pesos to keep it from appreciating too quickly and cushioning the impact of a strong currency on exports, foreign exchange remittances and revenues of the business process outsourcing sector, all key drivers of economic growth.
Capital inflows are expected to continue after the country's first-ever promotion to investment grade by Fitch last month, and with the other rating agencies likely to follow suit later in the year or next year. "We will be active in deepening our macro-prudential measures given expectations that there will be more (foreign capital) inflows to come," BSP Deputy Governor Nestor Espenilla told reporters over the weekend. "We will continue to review our toolkit."
The peso is down 0.73 percent to the dollar so far this year. It slid to a near six-month low last week as the growth pace for remittance inflows slowed and as offshore funds sold the currency. But analysts in a Reuters poll expect the currency to strengthen against the dollar, with the median forecast of 39.45 to the dollar by end-March 2014. To help manage the impact of foreign fund flows on the currency, the central bank on Thursday eased further rules on foreign currency transactions to encourage buying of dollars and stem the rise of the currency.
Policymakers have repeatedly said they would let the market determine the exchange rate but were ready to participate in the market to avoid sharp swings. "Banks have ample (dollar) liquidity, but in case banks need more dollars, BSP will be ready to sell," Assistant Governor Cyd Amador said. "The BSP is ready to sell or buy currencies to maintain orderly market conditions.