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.