Hiked interest rates to curb peso

by Miguel R. Camus, BusinessMirror

Posted at Jan 11 2013 07:37 AM | Updated as of Jan 11 2013 03:37 PM

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) may start to reverse its loose monetary policy and begin to increase record- low interest rates within the first two quarters of 2013 as domestic-driven inflationary pressures mount on strong economic growth, a visiting economist said on Thursday.

Michael Spencer, Deutsche Bank AG chief economist for Asia Pacific, told reporters in a media briefing that the BSP may raise rates three times this year and another three times in 2014 for an estimated increase of up to 150 basis points as the economy risks “overheating.”

Spencer said higher rates could see the Philippine peso appreciate to P38 against the US dollar for a full-year gain of above 7 percent. He said this might strengthen further to P36.5 in 2014. The Philippine peso gained over 6.8 percent in 2012, making it the second-best performing currency in Asia behind South Korea’s won.

The BSP cut overnight borrowing rates four times last year for a total of 100 basis points to 3.5 percent, partly to stimulate growth while taming the appreciation of the Philippine peso, whose strength has been cited in
hurting the country’s export and business-process outsourcing sectors. A strong peso also devalues money sent home by Filipino workers abroad, which helps drive domestic consumption.

“Because of the desire to try and take pressure off the exchange rate I think monetary policy is far too loose,” Spencer told reporters. “It would be healthy for the Philippines for interest rates to go up.”

Spencer said he does not expect any sudden increase in rates, as central banks in the region worry about capital inflows and the subsequent strengthening of their respective currencies.

Even then, monetary policy-makers are seen becoming “more accommodative” of currency appreciation, Sameer Goel, head of Asian rates and currency research at Deutsche Bank, said during the same briefing.

He said central banks have used various tools to tame currency appreciation but these would only “impact on the pace of the [appreciation] and not the trend.”

“We still think the [Philippine peso] will continue to appreciate and in fact be one of the outperformers in the region this year,” Goel said.

Spencer said Philippine gross domestic-product (GDP) growth is forecast to end the year at 5.5 percent, below the government’s forecast range of 6 percent to 7 percent.

The 2013 forecast is also slower than last year’s expected 6.3 percent growth but still relatively “high” when compared to Deutsche Bank’s “long-run potential growth rate” for the Philippines, Spencer said. Official full-year 2012 GDP growth figures have not yet been released.

Spencer said the inflation rate this year is forecast to end at 4.6 percent and 5 percent in 2014, higher than 3.2 percent in 2012.