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Manila Bulletin devider Business devider Lower US interest rates to benefit Philippines, Asia-Pacific—World Bank economist

Lower US interest rates to benefit Philippines, Asia-Pacific—World Bank economist

Published Oct 18, 2024 08:29 am

Financial markets in the Philippines and the broader Asia-Pacific region stand to benefit from downward interest rates in the United States, although risks from a "benign" US economy may temper gains, according to a World Bank economist.

"So far, the decline in interest rates in advanced economies seems to be helping the region," Ergys Islamaj, senior economist at the World Bank's East Asia and Pacific chief economist office, said in a webinar hosted by the Washington-based multilateral lender's Tokyo office on Friday, Oct. 18.

"Lower interest rates in the US and Europe are basically lowering the pressure of capital outflows [from emerging markets] and decreasing the pressure on their currencies, so it's good news," Islamaj explained, responding to a question asked by Manila Bulletin.

"There's some evidence that as interest rates and bond yields in the US decline, the appetite of risk-hungry investors for emerging-market risk is increasing," he pointed out.

Also, Islamaj noted that monetary policy easing in developed economies is providing "more space" for developing Asia-Pacific to likewise pull interest rates down.

The US Federal Reserve aggressively cut policy rates by 50 basis points (bps) in September, while the European Central Bank (ECB) reduced rates by another 25 bps on Thursday, Oct. 17.

Back in August, the Bangko Sentral ng Pilipinas (BSP) cut its key interest rate ahead of the US Fed and followed-through with another 25-bp reduction to six percent last Wednesday, Oct. 16.

The BSP is widely expected to again reduce the overnight borrowing rate by a similar 25 bps this coming December.

Islamaj said it helps that consumer price pressures have been contained in most of Asia-Pacific, except in Myanmar and Laos where inflation remains a concern.

In the Philippines, the headline rate fell to an over four-year-low of 1.9 percent in September, such that the BSP also lowered its inflation projection for this year to 3.1 percent from 3.3 percent previously.

However, Islamaj cited some commentators who are worried that the Fed's rate cuts signaled a US economy that may not be doing well.

"If the US economy is doing so well, the region will benefit from financial flows — it will be a positive for the region. But if the real economy is doing worse, the real flows basically are a disadvantage to the region," he added.

The US remains one of the major trade and investment partners of the Philippines and its neighbors.

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World Bank Group Philippine economy World Bank senior economist Ergys Islamaj
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