PHP: Little Impact From Narrower-Than-Expected Interest Rate Corridor

   

      The central bank governor announced on 16 May adjustments to the benchmark interest rate and the band around it. The benchmark interest rate will be cut to 3% from 4% currently. The interest rate corridor will be set plus and minus 50bp effective 3 Jun. The special deposit rate (SDA) will be replaced by the overnight deposit facility and the rate will be left unchanged at 2.5%. The lending rate is cut to 3.5% from 6.0%.

      The adjustment is an operational change to boost the effectiveness of the transmission mechanism and does not constitute a policy move. A narrower corridor would guide the market closer to the benchmark rate.

      This announcement did not have any significant impact on the USDPHP. Market viewed the rate cut as a change in policy direction but as part of the adjustment to make the policy rate more effective. The pair continues on its down move, which could be overdone, especially in the face of a dollar resurgence and given that policy uncertainty could still rear its ugly head.