Philippines Holds Benchmark Rate After Yuan Devaluation

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The Philippines left its benchmark interest rate unchanged for a seventh straight meeting as policy makers gauge the impact of China’s currency devaluation and gird for an impending increase in borrowing costs by the Federal Reserve.

Bangko Sentral ng Pilipinas kept the rate it pays lenders for overnight deposits at 4 percent, it said in Manila Thursday, as predicted by all 17 economists surveyed by Bloomberg. Policy makers also held the rate on so-called special deposit accounts at 2.5 percent as forecast.

China’s decision to let the yuan weaken by the most in two decades is presenting a dilemma for Asian policy makers struggling with slowing growth and exports. The Philippines has refrained from joining more than 30 central banks that have eased monetary policy this year, and Deputy Governor Diwa Guinigundo said today the BSP will keep a watchful eye on global conditions, with a focus on the currency.

“The central bank can afford to keep the policy rate unchanged for the rest of the year given the low inflation,” said Patrick Ella, an economist at Security Bank Corp. in Manila. “Monetary authorities want to reserve the policy rate as an instrument during more volatile periods.”

The central bank on Thursday lowered its inflation forecast for the year to 1.8 percent from 2.1 percent, while keeping its 2016 prediction at 2.5 percent. Consumer prices rose 0.8 percent in July from a year earlier, the slowest pace since at least 1998.

The peso closed 0.2 percent higher at 46.15 against the dollar ahead of the decision. While it is at a near five-year low, it has weakened less than other major Asian currencies this year, losing about 3 percent compared with an almost 13 percent drop in the ringgit and a 10 percent fall in the rupiah.

Curb Volatility

The Philippines wants an orderly foreign-exchange market, and will intervene to curb excess volatility, Guinigundo told reporters. The peso will remain flexible, even as its weakness benefits exporters and the outsourcing industry, he said.

The central bank will examine the effects of any move by the Fed on the financial markets and the Philippine economy, Guinigundo said. The monetary policy settings are appropriately calibrated and remain data-driven, he said.

President Benigno Aquino, who steps down in June 2016, is accelerating investment in infrastructure to spur growth to as much as 8 percent this year and next. The economy expanded 5.2 percent in the first quarter from a year earlier, the weakest pace since 2011, on slower public spending. Second-quarter data are due Aug. 27.

“The Philippine economy remains strong,” Guinigundo said. “There is no reason for additional monetary support,” and there is no need to respond to easing inflation, he said.

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