* Philippine short-term rates below policy rate corridor
* Thursday's rate cut, if any, may be last in Philippines
* Forward starting swaps in Korea, New Zealand too high
By Vidya Ranganathan
SINGAPORE, July 8 (Reuters) - While falling inflation and other economic growth compulsions have raised the odds of a rate cut in the Philippines this week, very low money market rates suggest the country's monetary easing cycle should be over.
Short-term Philippine yields are already below policy rates, which could mean that further rate cuts would not be of much use to businesses and other borrowers.
The central bank's overnight borrowing rate is 4.25 percent. The central bank's rate for interbank call money is closer to 4 percent, while the entire interbank curve upto almost a year is below 4 percent. Three-month PHIBOR is at 3.6875 percent.
"The bigger picture in the Philippines is that interbank rates are at record lows, the 2-year bond yield is near record lows and despite a budget deficit outlook that is worrying," said Jens Lauschke, a strategist with DBS Bank.
Traders said that was mainly on account of a huge amount of peso funds in the local banking system.
Policy rates have come down by 1.75 percentage points since December but the economic arguments for further easing are strong -- inflation is at a 20-year low and investment and personal consumption are faltering.
Yet, the money market curve also suggests corporates are able to borrow at below policy rates and peso supplies were abundant.
"We could have a rate cut tomorrow and three-month rates not moving much lower," Lauschke said. "I don't think there is a lot more rate cuts to come."
DBS Bank expects the central bank's borrowing rate to bottom at 4 percent, and stay there for a while.
HIGH FORWARD SWAPS
In several other markets in Asia, swap markets seemed to have run ahead of themselves, pricing in much higher rates in the next 12 months than warranted by economic conditions.
Woon Khien Chia, a strategist at Royal Bank of Scotland, compared the spread the one-year swap starting a year from now was trading at over the policy rate with spreads during past spells when monetary policies were on hold.
"Quite clearly, the spreads in won, rupee and Hong Kong dollar 1-year-1-year rates are way too high in comparison to their respective peaks during the last policy pause," Chia said in a note.
For instance, the rupee forward starting swaps show one-year rates at 4.26 percent in a year's time. That compares with the central bank's 3.25 percent borrowing rate.
RBS recommends investors receive front end rates in Korea and Hong Kong, saying that a "switch to monetary tightening is far off the horizon".
Similarly, analysts at Commonwealth Bank in Sydney found market pricing of forward starting swaps in New Zealand too hawkish.
New Zealand forward overnight indexed swaps showed markets pricing in 3-month swaps at 3.09 percent in a year's time and 2.72 percent 8 months from now. That compares with a 2.5 percent policy rate.
CBA strategist Jarrod Kerr advised investors to receive the 6-month OIS, with a six-month forward start.
"Even if the economy does find its footing and starts to recover quite quickly, the next most likely scenario is for the RBNZ to sit tight until July 2010 at the earliest).
"I find it very difficult to come up with a scenario in which the RBNZ finds itself in a position to hike rates early next year. Therefore, the trade in my mind offers low risk, potentially great reward, and carry," Kerr said in a note. (Editing by Kim Coghill)