Philippines Holds Rates After Peso Slumps to Six-Year Low

[jamesbond]

Philippines Holds Rates After Peso Slumps to Six-Year Low
By Karl Lester M. Yap and Siegfrid Alegado | Bloomberg

(Bloomberg) -- The Philippines left its benchmark interest rate unchanged for a ninth straight meeting, joining neighbors from Indonesia to Thailand in refraining from easing even as it cut inflation forecasts.
Bangko Sentral ng Pilipinas kept the rate it pays lenders for overnight deposits at 4 percent, it said in Manila Thursday, as predicted by all 16 economists surveyed by Bloomberg. Policy makers also held the rate on so-called special deposit accounts at 2.5 percent, as forecast by all seven analysts surveyed.
While China and Singapore have eased monetary policy in recent weeks to boost flagging growth, many emerging nations in Southeast Asia are holding fire to support currencies that are vulnerable to capital outflows should U.S. rates rise. Federal Reserve Chair Janet Yellen and her colleagues have signaled that a rate increase at their December meeting was on the table, and the peso slumped to a six-year low this week.
"The concern is: what sort of volatility will the Fed action create?", Gundy Cahyadi, an economist at DBS Group Holdings Ltd. in Singapore, said before the decision. "Central banks will play a cautious approach and in the Philippines, there is no urgent need to move interest rates for now. While there isn’t a huge risk of capital outflows, the peso is playing catch up with the weakness of regional currencies."
The peso has fallen about 5 percent against the dollar this year, according to data compiled by Bloomberg. The currency fell 0.1 percent to 46.98 per dollar in Manila Thursday. It slid to as low as 47.27 on Nov. 10, the weakest since 2009.

Sentiment-Driven

The peso’s moves have been sentiment-driven, and the country’s fundamentals remain firm, Bangko Sentral Deputy Governor Diwa Guinigundo said at a briefing in Manila. An increase in U.S. interest rates may spur risk aversion and trigger fund outflows, he said.

Gross domestic product growth of 7 percent to 8 percent is within reach next year and in 2017 as spending accelerates and remittances, investment and business process outsourcing remain robust, Guinigundo said. Domestic demand conditions have stayed firm, business and consumer sentiment is buoyant and domestic liquidity is adequate, Governor Amando Tetangco said.

There’s also little pressure to raise rates.

“Inflation is so low so the central bank has the luxury of delaying any rate hike prior to and after a Fed rate increase in December, in case that happens,” said Patrick Ella, an economist at Security Bank Corp. in Manila. “As far as gyrations in foreign exchange resulting from a possible Fed hike, Bangko Sentral ng Pilipinas has enough tools to intervene in the spot market.”

The central bank cut its inflation forecasts as the weakness in oil prices persists, Guinigundo said. The prediction for this year is for price gains of 1.4 percent, down from a 1.6 percent projection made in September. It lowered the 2016 estimate to 2.3 percent from 2.6 percent and the 2017 projection to 2.9 percent from 3 percent.
The challenging external environment and uneven growth prospects in advanced and key emerging economies supported the steady policy setting, Tetangco said.

--With assistance from Cecilia Yap, Ditas Lopez, Clarissa Batino and Norman P. Aquino in Manila and Michael J. Munoz in Hong Kong.