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By Maricel E. Burgonio, Reporter
THE Bangko Sentral ng Pilipinas (BSP)
will jack up interest rates until next year to strengthen the peso
and sustain price stability, according to the research unit of Union
Bank of Switzerland (UBS).
In a report, the Swiss investment
bank said the BSP would raise its interest rates by 50 basis points
in the remaining three months of the year and another 50 basis
points next year.
At present, the BSP’s overnight
borrowing and lending rates stand at 6 percent and 8 percent,
respectively. The central bank had already raised its policy rates
by a combined 100 basis points since June this year in response to
above-target inflation.
“We do continue to look for
more policy tightening in Philippines and Indonesia. Hence,
non-commodity price inflation pressures are more onerous and in the
case of the Philippines, higher interest rate[s] will help stabilize
[the] currency,” Edward Teather, UBS economist, said.
Teather said the peso would
appreciate next year to an average of 44 for every dollar from 46.45
this year. The government had forecast the local currency to average
between 42 and 45 to the greenback for this year.
The UBS economist said the peso
would strengthen if commodity prices stabilize, adding a strong
currency would be advantageous for the government given its high
debt stock.
“We expect the central bank to
continue edging policy rates higher, which should increase the
attractiveness of yields available in local currency,” Teather
said.
“A high foreign currency debt
stock means the Philippine government will want to avoid excessive
currency weakness if possible,” he added.
UBS said the Philippines and
Thailand would benefit the most from a sharp decline in inflation as
they posted the biggest adverse consumption impact in the first half
this year.
Food price inflation accounts for
around two-thirds of domestic headline inflation, with rice prices
accounting over a third of the increase.
The BSP expects inflation to drop
to an average of 6 percent to 8 percent next year from this year’s
9-percent to 11-percent forecast range. Price increases accelerated
to a 17-year high of 12.5 percent in August. Monetary authorities
had said inflation would peak this month and return to single-digit
levels in the early part of next year.
Remittances from overseas
Filipino workers (OFW) would also help to support the local
currency. The central bank expects total remittances to grow 11
percent to $16.6 billion this year, slightly higher than the earlier
forecast of 10-percent growth to $16.2 billion.
Teather said the monetary
environment suggests that inflationary pressures may persist even if
commodity prices fall. Inflation expectations may be peaking with
lower oil prices, but they are still relatively elevated for 2009.
This means that real interest rates, or the interest rates adjusted
to inflation, are still very low.
“The decline in interest rates
has spurred credit demand as firms have found it profitable to
borrow in order to build inventory or expand working capital in the
face of higher input costs,” he said.
UBS cited two scenarios for
inflation in Asia.
For the first scenario, Teather
said credit growth would continue to accelerate or remain high in
the coming months. This indicates the accommodation of commodity
price increases is spreading into a broader money-driven inflation.
For the second scenario, low
confidence is expected on the part of business and consumers, which
means that inflation expectations would fall quickly with commodity
prices.
At the Philippine Dealing System,
the peso slipped to 46.450 to the dollar from Wednesday’s 46.440
finish. Trading volume fell to $541 million from $877.600 million
the previous day.
The dollar, however, lost ground
in Asian trade on Thursday on continued uncertainty about the fate
of a massive US government bailout plan for the troubled financial
sector, dealers said.
Markets reacted nervously after
US President George W. Bush said in a rare television address to the
American public on the economic crisis that “our entire economy is
in danger.”
The dollar fell to 105.92 yen in
Tokyo morning trade from 106.19 yen in New York late Wednesday. The
euro rose to $1.4689 from $1.4617 and to 155.54 yen from 155.12 yen.
”There is uncertainty over the
plan, including when the US authorities would start purchasing [bad
loans] and at what price,” Hachijuni Bank dealer Sho Komamura said
of the proposed $700-billion bailout.
”Until some more details come
out, market players can neither buy the dollar nor sell it
aggressively,” he said.
The markets initially gave a
euphoric response late last week to the news that the US government
was ready to spend hundreds of billions of dollars to buy up
troubled mortgage assets.
But uncertainty has since swept
the market amid growing worries about its cost, likely effectiveness
and chances of being approved by Congress.
--With AFP
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