BSP seen on hold on Sept 13, cutting by year-end

Posted at 09/08/12 7:53 AM

MANILA - The Philippine central bank will leave its benchmark interest rate unchanged on Thursday but cut it by year-end to fortify the country's defenses against the global downturn and contain the peso's strength, according to a Reuters poll.

Ten of 12 analysts predicted no change in the overnight borrowing rate of 3.75 percent at the central bank's meeting on Sept. 13, given the domestic economy's relatively strong second quarter. The other two forecast a 25 basis point cut.

At its last meeting, in July, the central bank cut the rate for the third time this year, by 25 basis points.

Most economists in the poll expect the Bangko Sentral ng Pilipinas (BSP) to resume easing in the fourth quarter, with the median forecast for the year-end policy rate to be a record low 3.5 percent.

"Given the persistently benign outlook for inflation, the BSP is unlikely to lose focus on the need to temper the Philippine peso's strengthening via more monetary easing," said Jun Neri, economist at the Bank of the Philippine Islands.

The Southeast Asian economy's resilience, thanks to strong domestic demand and higher state spending, has attracted foreign capital inflows that have helped made the peso emerging Asia's best performer this year. As of Friday morning, it had strengthened nearly 5 percent against the dollar in 2012.

But while a strong currency can help ease inflation, it also makes the country's exports more expensive and reduces the buying power of remittances from overseas Filipinos, so crimping economic growth.

BSP Governor Amando Tetangco has said the current policy stance remained appropriate, despite faster-than-expected August inflation, but authorities were watching developments abroad because of their impact on capital inflows and global commodity prices.

Annual growth in the first six months of the year held up well at 6.1 percent, above the government's 5 to 6 percent target this year.

But slumping exports and a slowing farm sector meant second quarter GDP expanded only 0.2 percent from the first three months.

Also, economists said output may slow in the second half given weakening demand for the country's exports.

Policymakers have expressed their readiness to take action, if needed, to safeguard growth.

After Thursday, the central bank's last 2012 meetings will be in October and December.