Interest rates in emerging economies remain positive amid global easing

MANILA, Philippines - Fitch Ratings said real interest rates remain positive for most of emerging markets in Asia including the Philippines despite easy monetary policies across most of the region.

The debt watcher said most central banks in the region have either eased monetary policy or kept rates on hold since early 2015 to support growth in a less favorable external environment.

Fitch said subdued underlying inflation stemming from low oil prices helped monetary authorities keep rates unchanged for a prolonged period.

“While the Philippines and Malaysia have stayed on hold, India and Indonesia have cut policy rates since early 2015,” it said.

The Bangko Sentral ng Pilipinas (BSP) has kept interest rates unchanged since September 2014 due to sustained exonomic growth and the benign inflation environment.

The BSP has kept its policy stance steady for 13 straight policy setting meetings since October 2014.

With the shift to the interest rate corridor (IRC) system tomorrow, the BSP has adjusted the rates.

Starting June 3, the rate for the overnight lending facility would be adjusted downwards to 3.5 percent instead of six percent, the overnight reverse repurchase rate to three percent instead of four percent. The rate for the overnight deposit facility was unchanged at 2.5 percent or same as the special deposit account (SDA) rate.

Likewise, the BSP is set to auction P30 billion worth of seven and 28-day term deposits via the launch of the term deposit auction facility on June 8 as part of the shift in monetary operations to an interest rate corridor system.

BSP Governor Amando Tetangco Jr. earlier clarified the shift to the IRC system does not represent a change in the BSP’s stance but aims to improve the transmission of monetary policy.

Tetangco explained the country’s policy stance remains appropriate at the moment.

“Moving forward, the BSP will remain watchful of economic and financial developments to ensure that its primary mandate of price stability conducive to balanced and sustainable economic growth is achieved,” Tetangco said.

Meanwhile, Fitch explained data suggest the impact on domestic demand from higher lending activity is not as strong since the rate of credit expansion on average has remained unchanged over this period for most countries.

It added Vietnam and Sri Lanka are the exceptions with credit growth on average between 15 percent  and 20 percent.

“There remains room for interest rates to fall further, given positive real interest rates,” Fitch said.

The debt watcher believes the quality of policy management is likely to come into focus for sovereigns in this region when the US Federal Reserve increases its interest rates.