BSP still has room to cut key policy rates, says economist

MANILA, Philippines - A senior economist of the University of Asia and the Pacific (UA&P) believes there is room for the Bangko Sentral ng Pilipinas (BSP) to cut its key policy rates to record levels due to easing inflation.

Vic Abola said in an interview with reporters yesterday that the central bank’s Monetary Board could further slash its policy rates to boost the country’s slackening domestic output.

The BSP slashed policy rates by 200 basis points starting December 2008 to August this year bringing the overnight borrowing rate at a record low of four percent and the overnight lending rate at six percent.

The board kept its policy rates unchanged for two consecutive meetings as inflation rose to 0.7 percent in September from a 22-year low of 0.1 percent in August.

He said there is lack of inflationary pressures up to now so there is no compelling reason why local interest rates should not be allowed to fall.

He explained that real interest rates for both short and long ends of the curve in the Philippines are higher compared with the rates in the region as well as the United States.

If you compare domestic interest in the region and the US, we will find that our real interest rates at both the short and long ends of the curve are higher.

There is no compelling reason why we shouldn’t allow local rates to fall.

“To achieve higher growth, however, we need to let interest rates drop below present levels and allow the peso to depreciate a little,” Abola said.

He pointed out that the country’s gross domestic product growth slackened to one percent in the first half of the year from four percent in the same period last year. This was well within the government GDP growth target of 0.8 percent to 1.8 percent this year from 3.8 percent last year.

“We do expect a mild acceleration in the second semester due to improved economic conditions abroad, especially in East Asia, and early election spending by candidates,” the economist said.

However, he pointed out that the GDP growth would only be less than half of the growth trend of five percent since the new millennium on a full-year basis.

With a slightly easier monetary policy, Abola said the government could achieve a 2.5 percent growth this year and four percent next year with minimal inflationary impact.

The economist said the peso should weaken against the US dollar to benefit the families of Filipinos working abroad who are relying heavily on remittances.

“In our model, OFW remittances play an important role in nudging the economy to a faster pace. Our input-output analysis shows that a peso increase in OFW remittances translate to a P2.50 rise in incomes,” he added.

He pointed out that a unit of peso depreciation would translate to an additional 0.6 percent rise in GDP.

“Thus, an additional peso depreciation from now would eventually mean an additional 0.6 percent rise in GDP,” Abola said.