Interest rates still ‘too low’ to sustain PH growth

BSP Governor Nestor A. Espenilla, Jr. attended the unveiling of the bust of Dr. Jose Rizal at the Czech National Bank (CNB), the central bank in Prague, Czech Republic last June 25 together with his wife. This was one of the highlights of his bilateral meeting with his counterpart, CNB Governor Jiøí Rusnok. BSP Photo

“We do think that the rate increases will be gradual and modest, and so the adjustment to higher interest rates for households and corporates will be manageable.”

The current 3.5% policy interest rates of the Bangko Sentral ng Pilipinas (BSP) are still “too low” to sustain the country’s gross domestic product (GDP) growth, BMI Research, a unit of credit ratings Fitch Group, stated.

BMI made the statement on the back of two successive interest rate hikes implemented by the Monetary Board in a span of six weeks to temper the runaway inflation and the weakening peso.

“In our view, the interest rate is too low for an economy that is expanding by close to 7 percent, and this concern has also been echoed by bond investors, who are demanding higher returns for their expectations of higher inflation,” the Fitch think tank said.

It explained that the central bank has to keep pace with the rising interest rates across the globe to mitigate the effects of the continued downward spiral of the peso and inflation.

BMI Research continued, “While the BSP hiked its benchmark interest rates by a total of 50 basis points in May and June and signaled that it is prepared to continue hiking to safeguard macroeconomic stability, this is likely to be offset by rising interest rates globally.

We forecast another 25 basis points rate hike before end-2018.”

The Fitch unit predicts another round of rate increase before the end of this year with overnight reverse repurchase (RRP) rate to settle at 3.75 percent from the current 3.50 percent.

In its policy meetings last May 10 and June 20, BSP raised a total of 50 basis points to its key policy rates.

Meanwhile, an independent analysis by Moody’s also echoed the forecast of a fresh round of policy adjustment as it dismissed speculations of risk should the BSP further raise the country’s interest rates.

“We do think that the rate increases will be gradual and modest, and so the adjustment to higher interest rates for households and corporates will be manageable,” said Moody’s Investors Service senior analyst Simon Chen. He added there is still plenty of room for banks to profit from the back-to-back interest rate hikes.

Chen told reporters at a media briefing that he does not see any significant asset quality pressures at the moment. He added, “We do think when interest rates go up, that’s when banks will benefit with wider interest margins.”

At the same time, Chen said that Moody’s is maintaining its “stable” outlook for the Philippine banking sector, as the credit rating agency believes that the country’s macroeconomic fundamentals remain strong that would allow growth in the lending space.

The BMI Research cautioned the BSP that failure to keep pace with the rising interest global interest rates could further hurt the local currency.

For next year, central bank’s key policy rate is expected to be stable at 3.75 percent. With PNA