Domestic interest rates, best reflected by the benchmark rate of the Bangko Sentral ng Pilipinas (BSP), are seen to mirror the reduction adopted by the US Fed, which has cut its own benchmark by 50 basis points, analysts say.
But views differ as to the depth of the reduction, with one saying the BSP could match the cut by as much as 50 basis points in lock step with the US Fed, the world’s leading central bank.
Mike Ricafort, chief economist at Rizal Commercial Banking Corp. (RCBC) notes the Hong Kong Monetary Authority, for instance, tended to move in lock step with the US Fed.
“There’s a good chance the BSP will keep the interest rate differential” and match the so-called US fed funds rate, according to Ricafort. The differential relates to the gap in the interest rates of the US and the Philippines in this case for purposes of preserving the status quo in terms of investment and trade flows, currency exchange rates, among others.
Another analyst from AB Capital Securities believes the rate reduction should not be deeper than 25 basis points.
Either way, both are of the view that the BSP is moving in the direction of the overnight rate of 4.5 percent to 5 percent.
The BSP in mid-August adopted a 25 basis-point off-cycle cut in the benchmark rate to 6.25 percent which defied the market consensus of a stay in the rate at which it lends to or borrows from the banks.
The decision came in the wake of the economy posting output expansion measured as the gross domestic product (GDP) averaging 6.3 percent in the quarter ended June this year.
The same was adopted as headline inflation fell sharply to 3.3 percent in August, lower than consensu of 3.6 percent, from 4.4 percent in July.
Ricafort reads the US Fed rate cut as a pro-growth policy decision meant to spur greater economic activities in the world’s largest market.
The analysts said as the cost of funds decline, the local currency, the peso could strengthen further to the P54-per-dollar level over the medium horizon and help guide fair valuation price-earnings to 10 up to 12 times at the Philippine Stock Exchange.
“As local interest rates decline, the stock market fair valuation P/E will rise to 15 times with lower interest rates being used for discounted cash flow analysis,” the analyst said.
