RP may raise interest rates on baht woes

RP may raise interest rates on baht woes

MANILA (Reuter): Philippine interest rates could rise as the government tries to fend off any spillover from the crisis facing the Thai baht, bankers said yesterday.

Treasury bill rates soared almost 50 basis points at auction on Monday after the Central Bank was forced to raise its closely- watched overnight borrowing rate twice in a month to protect the peso from any Thai-inspired attacks.

"It would not surprise me if the three-month rate went up by another 50 basis points in the next couple of weeks," Hongkong and Shanghai Banking Corp treasurer Mark Boyne said.

Another banker said the 91-day T-bill rate, which is now at 10.777 percent, would go to 11.5 percent, above the year's high so far of 11.172 percent in January.

Though more money is likely to pour out of banks when the Central Bank implements a one point cut in reserve requirement next week, interest rates will stay high, bankers said.

"Interest rates now are being determined by the foreign exchange market," the chief dealer of a bank said. "What's another six billion pesos when the reserves are cut? That's just a drop in the bucket."

Bank traders point out the Central Bank had time and again used interest rates as its weapon to hold the peso.

However, interest rates at current levels do not reflect the country's economic fundamentals, they said.

"We should be steadily going down in interest rates. Inflation is down, the balance of payments and the national government budget are in surplus, and reserve money is within IMF limits," said Rafael Algarra, vice president of Standard Chartered Bank.

"It's not in our hands. It's in the hands of foreign fund managers," Algarra said, adding investors had grouped the Philippines in the same basket with Thailand, Indonesia and Malaysia.

Devaluation

Foreign fund managers are currently watching out for a possible devaluation in the Thai baht as its economy slumps.

Since April, the Philippines' financial markets have been battered as foreign investors dumped property and banking shares on fears the country would copy Thailand's problems in these sectors.

Philippine stocks fell to a two-year low in April and the Central Bank was forced to raise overnight interest rates to a two-year high of 20 percent in May.

Though the Central Bank gradually lowered its rate afterwards, it was forced to raise it again last week to 15 percent due to renewed speculation caused by the resignation of Thailand's finance minister Amnuay Virawan.