Concern’s about PH’s excess liquidity persist

Expect no rate move this week.

The country’s central bank, Banko Sentral ng Pilipinas (BSP) clarified some points over the week.

According to DBS, firstly, by suggesting that the overnight borrowing rate is not the best tool to manage the rebalancing process, the BSP hints that no rate cut/hike is imminent.

Secondly, the BSP also cautioned over possible excesses in the financial system due to global rebalancing efforts. DBS says that the BSP remains concerned about excess liquidity in the financial system.

As such, the BSP is likely to stress the need to remain vigilant of excess liquidity in the financial system though. Loan growth continues to hover near 20% (YoY) while capacity utilization is already at record-highs. Some overheating risks remain despite the string of monetary policy tightening seen in 2014. The preference is clearly tilted towards further policy tightening into 2016.

Here’s more from DBS:

Nevertheless, there are pressures for the BSP to loosen its policy stance. That most of Asia is in easing mode will not go unnoticed. And more importantly, CPI inflation has been falling. Arguably though, a strong currency is as big a driver of falling inflation as the drop in oil prices.

As such, it is interesting that the peso has been somewhat underperforming its regional peers in the month-to-date, reversing the trend over the past year. The BSP is unlikely to trim its policy rate ahead, but some policy easing could already be underway through a weaker currency.