Eyes on BSP interest rates after stock selloff

Abstract (Summary)

In a research note, Philippine Equity Partners Inc. (PEPI) said the Monetary Board is likely to maintain its interest rates and tiering scheme for banks' overnight placements with the BSP, but added that such a steady monetary policy would be due to the improvement in lending growth and a further deceleration of domestic inflation.

"The main factor against a rate cut is the fact that loan growth already started to pick up in late 2006, aggregating that the tiered rate structure may already be doing its job," the report said, referring to a BSP scheme that puts a cap on the amount that lenders can earn from their overnight deposits with the central bank. The scheme is aimed at encouraging banks to lend to the public instead of placing their excess funds with the BSP.

A securities analyst said the BSP may remove the tiering scheme by the second quarter. "It would be crucial in the first half of the year--the BSP may . . . remove the tiering by the second quarter. It will have a big impact in the market if the tiering is removed without the cut in the overnight rates," the analyst said.

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Mar. 5--INVESTORS will train their eyes on the Bangko Sentral ng Pilipinas this week, as its policymaking Monetary Board is scheduled to meet Thursday and decide on whether to keep its key interest rates steady, especially after selling pressure hounded local stocks and the peso on the heels of a sharp correction in many equities markets worldwide.

The margin that BSP overnight rates maintain over comparable United States rates has helped generate investor interest in Philippine financial assets. Huge inflows of foreign money in turn have kept the peso strong vis--vis the dollar.

Last week's global fall in equities markets, including the Philippine Stock Exchange, was triggered by a decline in the Shanghai bourse, considered its biggest drop in a decade. The China bourse's plunge was set off by fears of a slowdown in the United States, the world's largest economy and the mainland's main export market.

In a research note, Philippine Equity Partners Inc. (PEPI) said the Monetary Board is likely to maintain its interest rates and tiering scheme for banks' overnight placements with the BSP, but added that such a steady monetary policy would be due to the improvement in lending growth and a further deceleration of domestic inflation.

The securities firm said price increases are seen to further decelerate to around 3 percent in the second quarter of the year. The BSP earlier said average inflation may edge closer to the lower end of the 4-percent to 5-percent target range this year.

"The main factor against a rate cut is the fact that loan growth already started to pick up in late 2006, aggregating that the tiered rate structure may already be doing its job," the report said, referring to a BSP scheme that puts a cap on the amount that lenders can earn from their overnight deposits with the central bank. The scheme is aimed at encouraging banks to lend to the public instead of placing their excess funds with the BSP.

The central bank pays 7.5 percent on overnight deposits, and charges 9.75 percent for overnight loans.

On the tiering scheme, PEPI said there is less incentive for monetary authorities to remove it due to double-digit loan growth in 2006.

Commercial banks' outstanding loans rose by 10.1 percent in December to reach P1.695 trillion from a 6.8-percent rise in November.

"Although speculation remains strong that monetary authorities will remove [the tiering] scheme in place of a sizable 50 basis points outright rate cut, we are beginning to think that there is less incentive for them to do so. We are now less confident that rates will be cut on March 8 but are encouraged by the thought that loan growth is already improving despite no rate cut," the securities firm said.

BSP Deputy Governor Diwa C. Guinigundo said monetary authorities are waiting for three months to see the impact of the tiering scheme on lending growth before making any changes.
A securities analyst said the BSP may remove the tiering scheme by the second quarter. "It would be crucial in the first half of the year--the BSP may . . . remove the tiering by the second quarter. It will have a big impact in the market if the tiering is removed without the cut in the overnight rates," the analyst said.

Besides boosting the peso, strong foreign currency inflows also fuel a rise in domestic money supply, which if unchecked would spur higher inflation.

Last week the central bank said the high-liquidity growth may be inflationary if it continues for a year. The country has been experiencing double-digit liquidity growth for nine months.
Removing the tiering scheme would keep high liquidity from becoming inflationary and minimize the participation of local players in the domestic stock market, the analyst said. Investors have flooded the domestic stock market given historically low yields for government bonds or IOUs, a traditional source of trading gains.

Francis Lim, PSE president, said local participation at the bourse has been increasing.