The Bank of the Philippine Islands (BPI) is convinced the country’s inflation path is “clearly under control” and projected two rounds of interest rate cuts by the Bangko Sentral ng Pilipinas (BSP) before the year is out.
Jose Teodoro K. Limcaoco, BPI president and CEO, said many in the financial community expect a reduction in the key policy rates, likely in August and one other in subsequent months, depending on how inflation behaves the rest of the year.
“Let’s put it this way. There are no hindrances to cut rates in August so there’s an expectation that he will,” Limcaoco said of Eli Remolona who chairs the policy-making Monetary Board of the BSP.
According to Limcaoco, even the foreign exchange (FX) market seems very well behaved.
Limcaoco said the BSP governor has sent out this message quite perfectly the last two or three months and the local currency the peso has behaved accordingly.
“(Should) he actually does it, I don’t think the currency is going to react because everyone’s expecting it so this is perfect for the BSP. Well played,” Limcaoco said.
This has reference to how the peso behaves in relation to the US dollar used by foreign investors and entrepreneurs as a guide in international transactions. A cut in the policy rates of the BSP, for example, tends to encourage imports as the local currency strengthens and foreign goods appear cheap in peso terms. But peso-denominated investment tools like corporate and sovereign bonds present comparatively unattractive returns and bondholders consequently dump them.
The local currency has proven steady in recent months, averaging P58.696 in June, P58.484 in July and has proven steady at P58.488 per dollar as of latest, based on BSP data.
Limcaoco also acknowledged the BSP keeping the rates steady has proven rather costly for the banks in the form of higher loans-to-deposit ratios as the industry chased deposits from the public.
“As the BSP brings down the policy rates, maybe we’ll take a look and say maybe it’s time to build our deposits again,” Limcaoco observed.
Bringing down the policy rates should also be positive for the corporate sector as they start borrowing from banks again.
As rates sink, bank margins compress, forcing banks to shift portfolios to loans less sensitive to policy rate adjustments.
“Remember all the BSP can do is a policy rate adjustment so things like auto loans or mortgages are not as sensitive. They react much later,” Limcaoco said.
