Foreign banks expect further monetary easing

Foreign banksare expect further monetary easing even as the Bangko Sentral ng Pilipinas (BSP) is turning out to be among the least aggressive central banks in the region.

HSBC said it is expecting another 50-point cut in the first half of 2009, with the bank’s economists saying that Thursday’s “bold move” suggested that the policy rate might ultimately bottom at around 4.5 percent.

Hong Kong-based economist Fredric Neumann said yesterday that with the surprise 50-point cut on Thursday, the BSP was the last major Asian central bank to ease monetary policy into this cycle.

Neumann is senior Asia economist for the Global Banking and Markets department of the Hong Kong and Shanghai Banking Corp. Limited (HSBC).

While HSBC had initially pencilled in a 25-point cut for the Monetary Board’s meeting this week, Neumann said a more aggressive move was increasingly likely following the US decision to knock the Fed Funds target down to 0-0.25 percent.

He pointed out that in the subsequent press conference, BSP deputy governor Diwa Guinigundo provided a “mixed message,” both underlining growth risks as the rationale for today’s cut and reiterating the BSP’s headline inflation forecast of 5.5 percent for 2009 and 5.25 percent for 2010.

“The BSP’s inflation forecast suggests that it maintains a fairly hawkish stance,” Neumann said, adding that Guinigundo had cautioned against rising commodity prices and a lower peso that might ultimately stoke inflation. But, he said the actual figures might surprise officials.

“For once, we disagree with the authorities on their inflation forecasts and believe that price pressures will abate more rapidly than officials currently envisage,” Neumann said.

“This, along with rapidly decelerating growth, should open the door to further rate cuts,” he added. “We had originally pencilled in 100 points in easing over this cycle and there could be further downside to our forecast given the deepening global slowdown.”

Neumann said Thursday’s cut also indicated that the BSP was relaxed about the exchange rate. He noted that in recent weeks, the peso has stabilized, and healthy remittances should keep the balance of payments well supported into year-end.

“While we do expect a sharp fall in remittances in 2009, possibly down up to 20 percent for the year, the overall current account should remain in surplus given the drop in oil prices and the high import content of exports,” he said.

The bottom line, according to Neumann, was that rates could go down further. But given all the caveats, it would also indicate that the BSP would remain among the least aggressive central banks in the region.

“First, lingering inflation pressures are keeping officials on guard,” Neumann said. “Second, the financial system remains flush with liquidity and outright cuts will have little impact on growth.”

According to Neumann, what the country really needed at this time, was more fiscal spending to stimulate the economy.

“Third, while the peso has stabilized, we suspect the authorities will try to pre-empt any potential volatility in the exchange rate by keeping monetary policy relatively tighter than elsewhere,” Neumann said.