BSP fuels rate cut talk ahead of Thursday meeting


Posted at Jul 24 2012 11:17 AM | Updated as of Jul 25 2012 03:00 AM

MANILA (UPDATE) - The Philippine central bank said it has scope to adjust monetary policy, fueling talk that it may cut interest rates on Thursday, but analysts are not fully convinced that further easing is warranted given strong domestic demand.

Governor Amando Tetangco said on Tuesday the central bank has room to tweak policy as he forecast annual inflation in July would be between 2.6 percent to 3.5 percent, reinforcing the bank's view that inflation will average near the lower end of its 3 to 5 percent target this year.

"The inflation average over the policy horizon is still expected to fall closer to the lower end of our target range," Tetangco told reporters in a mobile text message.

"Our current view is that there is some scope to adjust monetary policy settings to protect the inflation target on the downside," Tetangco said.

Tetangco said the central bank would continue to monitor global developments like movements in international commodity prices and shifts in investor appetite that may affect capital flows to assess their potential impact on domestic inflation and growth.



Tetangco's remarks were the latest in a string of dovish comments by policymakers in recent weeks which appeared to open the door to another rate cut as the global economy slows.

But most analysts still expect the central bank to leave rates unchanged at its policy meeting on Thursday.

Eleven of 12 economists polled by Reuters earlier this week saw no change in rates on Thursday. At least two changed their view to a cut after Tetangco's comments, but the majority still expected it to hold off on any further easing, arguing that domestic demand remained strong and capital inflows may be better managed by non-rate tools.

"We had earlier maintained that the bank has the room to lower the benchmark rate given tame inflation outlook, though with growth still holding up well, there is little urgency to tweak rates as yet," said Radhika Rao, economist at Forecast in Singapore, who stuck to her view that the bank would remain on hold for now.

The overnight borrowing rate is currently at a record low 4 percent after the central bank cut policy rates in January and March to shield the economy from the global slowdown.

The World Bank and the International Monetary Fund had raised their growth forecasts for the Philippines following the country's stellar performance in the first three months of the year, but they warned Manila faces external risks in the coming quarters.  

To discourage speculation in the foreign exchange market, the central bank tightened the rules on its short-term special deposit account (SDA) window earlier this month to keep foreign funds out of the facility, and on July 13, it lowered the SDA rates.

"While some market participants are expecting a rate cut, especially with the BSP Governor sounding more dovish, we reiterate our call for a hold on Thursday," said Trinh Nguyen, an economist at HSBC in Hong Kong.

"(We) believe that a cut will only have a short-term effect, as inflows are due to strong fundamentals rather than speculative in nature."

Authorities have allowed the peso to firm by more than 4 percent against the U.S. dollar so far this year, helping to curb imported inflation despite the risk that the stronger currency could weigh on exports.