Low interest rates a downside risk

0

Macroeconomic stability could be threatened by the Philippines’ record low interest rates, a Fitch Group unit warned.

“We highlight the risk that the record low interest rates may lead to speculative and unproductive investment decisions, posing increasing downside risks to macroeconomic stability in the coming years,” BMI Research said in a report released on Wednesday.

The Bangko Sentral ng Pilipinas (BSP), after lowering its reverse repurchase rate to 3 percent from 4 percent on May 16 last year in the run-up to adopting an interest rate corridor system, has since kept key interest rates unchanged.

The BSP’s overnight deposit and lending facilities rates also remain at 2.5 percent and 3.5 percent, respectively, while the reserve requirement ratio has been held at 20 percent.


“Already, we have seen the low interest rate environment since 2010 lead to heavy lending by commercial and universal banks to the real estate sector, with the sector loan exposure growing at around or more than 20 percent for the 25th consecutive quarters through June 2017,” BMI said.

The peso’s relative underperformance relative to emerging markets (EM) since the start of the year, it added, could also be an indication of an underlying distortion built up in the economy.

“[W]e believe that any broad-based EM FX (foreign exchange) selloff could hit the PHP (Philippine peso), despite the currency being close to fair value according the REER (real effective exchange rate)” BMI said.
The local currency is currently trading between the P50 and P51 to a dollar level.

With real interest rates likely to head higher in the US with the hiking cycle, which could result in a decline in foreign capital flows, BMI believes the peso will be increasingly at risk in the absence of a corresponding tightening move by the BSP.

While the Bangko Sentral has said that inflation will remain firmly within the 2-percent to 4-percent percent target over policy horizon, BMI said interest rates were currently too low for an economy that is growing at around 10 percent in nominal terms.

It said inflationary pressures in the Philippines are likely to pick up further in the coming months, projecting it to climb to 4 percent by the end of 2017, before averaging 4 percent in 2018.

Headline inflation rate picked up to 3.1 percent in August, from 2.8 percent in the previous month, and from 1.8 percent a year earlier.

“[W]e believe that the cost of borrowing is currently too low for the level of economic growth, and with interest rates rising in the US and inflationary pressures in the Philippines likely to pick up further in the coming months, our view is for the central bank to hike rates by 25bps (basis points) in 2017 and again in 2018,” BMI said.

Share.
.
Loading...

Please follow our commenting guidelines.

Comments are closed.