• IRC could drive peso lower – analysts


    The central bank’s cutting of its key policy rate as part of its shift to the interest rate corridor (IRC) system from June 3 could put downward pressure on the peso, but apart from that would have limited impact on Philippine markets, analysts said.

    On Monday, the Bangko Sentral ng Pilipinas (BSP) announced its adoption of the IRC system starting next month, which includes a new standing overnight deposit facility (ODF) replacing the special deposit account (SDA) as the rate setting for the lower bound of the corridor.

    A new standing overnight lending facility (OLF) replaces the current overnight and term repurchase facility as the upper bound of the corridor. The lower and upper bounds of the corridor are set at plus-or-minus 50 basis points around the policy rate.

    The overnight reverse repurchase rate or the policy rate will be adjusted lower to 3 percent from 4 percent currently.

    For Singapore-based bank DBS, any immediate impact of the BSP’s operational changes for the IRC shift is likely to be limited, and not expected to have an effect on lending.

    “Bank loans are typically priced on longer-term government bond yields, which are unlikely to be affected by the shift to the IRC system for now,” it said.

    Meanwhile, banking giant HSBC said the BSP move was expected and should have no impact on monetary policy or the real economy in the short term.

    It said what will be more important, is to look out for possible tweaks to policy following the implementation of the IRC on June 3.

    “Should inflationary pressures remain low and below-target, a cut to the RRR [reserve requirement ratio]is likely as early as the 23 June BSP policy meeting,” it said.

    “Moreover, while we do not currently sense an easing bias, we cannot rule out future downward shifts of the entire corridor in the future, particularly if infrastructure growth starts to slow after the political transition and inflation remains weak,” it added.

    Peso impact
    DBS said that while the IRC implementation would likely have only a muted impact, the response of the peso to the shift should be monitored closely.

    “On the surface, what appears to be a “cut” in the policy rate should be negative for the currency. But in the event that the IRC system actually leads to higher short-term market rates, the impact could very well be the opposite,” the lender said.

    HSBC also said that the BSP’s new monetary policy framework would not have a significant impact on the Philippine peso immediately, but that BSP signals of possible upcoming policy adjustments made necessary by the IRC implementation could have a negative effect.

    The risk for the peso in the short term, HSBC said, was whether trusts, which have foreign funds, would still have access to the ODF, the replacement for SDA.

    “The BSP, however, has given assurances that trusts will be able to access these facilities and therefore foreign outflows should be largely limited. Over the longer term the new framework will help improve the transmission mechanism of monetary policy to the real economy and this will ultimately be beneficial for the Philippine peso,” it said.

    HSBC said of more importance in the near-term is the BSP’s suggestion that it will cut the RRR for banks once it officially implements the interest corridor.

    Signs that the BSP is willing to begin easing monetary policy through this route may inhibit the peso’s performance, it said.

    “Indeed, this is in line with our view that the Philippine peso will lag the other currencies in Asia this year,” it concluded.


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    1 Comment

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