GlobalSource expects BSP to cut rates

GlobalSource, a New York-based think-tank, expects monetary authorities to cut key policy rates in their next rate-setting meeting on Jan. 29.

In its latest report on the Philippines, GlobalSource said the Philippine central bank could cut rates by 25 basis points due to easing inflation.

“Our expectation is a 25 or maybe even 50 basis points cut in the next rate-setting meeting on Jan. 29, depending on the fourth quarter 2008 national income account results scheduled for release that day and possibly also on exchange rate developments,” GlobalSource said in a report co-authored by former Finance Undersecretary Romeo Bernardo.

GlobalSource quoted Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. as saying that a moderation of inflation risks provides an opportunity for monetary easing.

The central bank’s overnight borrowing rate is currently at 5.50 percent while the overnight lending rate is currently at 7.50 percent.

GlobalSource noted that inflation has eased in December, settling at eight percent. This was better than the 8.6 percent to 9.5 percent forecast of the central bank for the month and also significantly slower than the 9.9 percent recorded in November.

“This softening of prices paves the way for another rate cut, which is encouraged by gloomier expectations for domestic demand in the New Year, especially given likely slower remittance growth and a relatively resilient peso which surged in the first few days of trading after the holiday break due to a build-up of overseas workers’ remittances,” GlobalSource said in its report.

GlobalSource said a cut in interest rates would help sustain consumer spending and cushion a possible hard landing of interest-rate sensitive sectors.

Furthermore, the think-tank said a cut in interest rates would also help maintain confidence in markets given financial tensions that have tightened credit conditions.

“Declining inflation and interest rate easing are trends elsewhere in the Southeast Asian region, where rate cuts are similarly expected this year in light of an economic slowdown,” GlobalSource noted.