Philippines may end rate cuts, anticipating economic recovery

The Philippine central bank will probably end its longest series of interest-rate cuts since at least 2002 as the global economy recovers.

Bangko Sentral ng Pilipinas will hold its benchmark interest rate at a record low of 4 percent today, according to 13 of 15 economists surveyed by Bloomberg News. Two expect a quarter-point cut.

A nascent recovery from the worldwide recession has increased prospects of a revival in inflation, prompting countries from Thailand to South Korea to pause after slashing borrowing costs to revive growth. The Philippines will aim for a “controlled shift in the direction of our policy stance,” Governor Amando Tetangco said August 11.

“Inflation has bottomed out already and will start to go up,” said Luz Lorenzo, an economist at ATR-Kim Eng Securities Inc. in Manila. “Commodity prices are the bigger risk as economies recover.”

Easing inflation allowed the Philippine central bank to cut its key interest rate by 2 percentage points from mid-December to July to bolster growth as exports collapsed. Consumer-price gains slowed to a 22-year low of 0.2 percent in July.

“Disinflationary forces” will dissipate as the year progresses, Tetangco said July 29. The price of oil, which in the Philippines is almost all imported, has risen about 50 percent this year.

Growth Outlook

The Philippines’ $167 billion economy expanded 0.4 percent in the first quarter, the weakest pace in a decade. The government, which will report second-quarter gross domestic product data on August 27, has said it expects growth to improve in the coming quarters.

“I wouldn’t encourage them to do more rate cuts,” Economic Planning director Dennis Arroyo told reporters in Manila today, even as he said the economy may have contracted 0.1 percent last quarter. government spending should “kick in” and third-quarter data indicate an “upswing,” he said.

The Philippine Stock Exchange Index fell 1.5 percent to 2,720.18 at the close of trading at noon, contributing to a 4.6 percent decline for the week, the biggest drop in nine weeks. Tomorrow is a holiday in the Philippines.

Asian nations from Taiwan to Malaysia have reported smaller declines in exports as the world recovers from its worst slump since the Great Depression. China’s economy grew 7.9 percent last quarter from a year ago, while Singapore’s expanded an annualised 20.7 percent from the previous three months.

Completed Easing

The Bank of Korea kept its benchmark interest rate unchanged at 2 percent for a sixth month last week after its economy expanded at the fastest pace since 2003 in the second quarter. Australia’s central bank this month kept borrowing costs unchanged for a fourth time.

“Like other central banks across the region, Bangko Sentral has likely completed its easing cycle,” said David Cohen, an economist with Action Economics in Singapore. “With inflation subdued, they should remain patient, maintaining interest rates steady into next year, before likely raising rates around mid-2010.”

Bangko Sentral will likely keep borrowing costs at 4 percent for six months to a year, ATR-Kim Eng’s Lorenzo said.

http://www.bloomberg.com/apps/news?pid=20601009&sid=api5j_6O.9g0

 

Category: Philippines