The monetary authorities have since declared that an interest-rate hike is out of the question for the rest of the year and yet some form of easing on the policy levers needs to be pursued to head off likely complications arising from an interest-rate hike by the US Federal Reserve (the Fed).
Against this background, Joseph Incalcatera, an economist at the British-owned lender HSBC, said the Bangko Sentral ng Pilipinas (BSP) can do the next best thing to an
interest-rate hike of its own.
Since the BSP has made it abundantly clear that an interest-rate hike is out of the question over the remaining two rate-setting meetings of the Monetary Board, a de facto easing could still be pursued by narrowing the gap between the rate at which the central bank lends to banks and that of its so-called special deposit rate.
At a recent engagement with financial reporters, the HSBC official said such an adjustment has the effect of a de facto easing but without the complications that could arise from an interest-rate adjustment by the US Fed.
The view comes in contrast with some of his peers saying that the next move of the BSP will likely be a rate hike.
Barring unforeseen inflation pressures, Incalcatera said the BSP could opt to narrow the gap between the lending rate of the BSP and the rate for its special deposit account
(SDA) window.
This pertains essentially to a proposed structure called an interest-rate corridor by the monetary authorities and proposed for adoption early next year.
The IRC will be implemented in the second quarter next year and considered a more effective framework in pursuing the country’s monetary-policy objectives.
The IRC, BSP Governor Amando M. Tetangco Jr. earlier said, will be around the BSP’s policy rate and SDA facility rate. The BSP’s lending or repurchase (RP) rate will be the ceiling of the corridor and the SDA interest rate will be the floor of
the corridor.
At present, the country’s lending or RP rate—the ceiling of the corridor—is at 6 percent, while the SDA rate—the floor of the corridor—is at 2.5 percent.
To narrow this gap further, Incalcatera said the BSP may cut the RP or lending rate next year. As to the magnitude and the timing of the cut, the economist said they await further cues from the central bank.
Incalcatera also said the BSP has indicated any monetary-sector adjustments will not be made in consideration for either inflation pressures or threats to growth but as a measure making more effective in steering the liquidity and inflationary conditions of the country.
As to why the BSP will choose to ease the RP rate instead of raising its SDA rate for a narrower corridor, Incalcatera argued that the cost for the BSP is already high because of the volume of the parked funds in the special deposit facility and the relatively high 2.5-percent
interest rate.
Raising it, he said, will even be more expensive for the central bank.
The Monetary Board will be having its seventh and penultimate rate-setting meeting today.
Economist comments and signals from the BSP make more compelling the expectation there will not be any changes to the central bank’s monetary-policy stance at the
today’s meeting.