MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is likely to cut interest rates by another 25 basis points (bps) before the end of the year to encourage further spending while reducing excess liquidity, a top bank economist said.
Citi Asia Pacific chief economist Johanna Chua said the BSP will make the rate cut to deal with excess liquidity, including excess reserves.
“The challenge to the Philippine central bank is to reign in on excess liquidity that could strengthen the peso. It could also lower rates of the special deposit accounts (SDA) and the levels of reserve requirements on banks,” Chua added.
She said the BSP already used opportunities of a strong risk-on environment to cut rates but believes the central bank will use macro-prudential tools to manage capital flows.
Interest rates already are at a low 3.75 percent and 5.75 percent for overnight borrowing and lending, respectively.
Chua, however, warned that monetary authorities should be more concerned with the health of the banking sector in lieu of strong borrowings from both the public and private sector.
The prevailing low interest rates has resulted in an avalanche of borrowings that may result in a property sector bubble or a sudden increase in non-performing assets (NPAs) and non-performing loans (NPLs) of the banking system.
As of June this year, mortgage loans amounted to P546.455 billion, up 18.9 percent from last year’s P459.866 billion. It is also an increase of 4.2 percent compared to the first three months’ figure of P524.128 billion.
But the Citi economist said the bigger challenge of the Philippines is not interest rates or a threat of a property bubble or a extremely strong peso.