DBS expects 1 more rate cut for BSP

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) may again cut its policy rates on Aug. 20, its next rate-setting meeting, the Development Bank of Singapore (DBS) said in its latest report on the Philippines.

DBS said that while monetary authorities have already reached the bottom of the easing cycle, “we will concede that chances of one more rate cut come Aug. 20 are inching higher.”

It said the economy still needs some support following its lackluster performance in the first quarter.

Early this month, the BSP cut its key policy rates for the sixth time to four percent for the overnight borrowing rate or the reverse repurchase facility and six percent for the overnight lending or repurchase facility.

“In our view, the central bank is essentially waiting to see exactly just how bad, or how good, economic growth might have been in the second quarter of 2009,” DBS said.

In the first quarter of the year, the economy grew by only 0.4 percent, which was below the government’s first quarter growth projection of 1.8 percent to 2.8 percent and below the adjusted 3.9 percent expansion recorded in the same period last year.

However, for the second quarter of the year, officials expect the economy to have expanded faster than the 0.4 percent registered in the first three months of the year.

DBS said that if the central bank does not cut interest rates on Aug. 20, it is unlikely to pursue non-conventional easing measures.

“The non-conventional measures taken so far - lowering of reserve requirements, enlarging the rediscounting budget, and providing easier access to the rediscounting facility - were introduced largely to counter the tightness in domestic liquidity conditions as a result of the global credit crunch,” DBS said.

The Singapore-based bank said that the conditions that prompted the central bank to take non-conventional measures in the past have already “thawed significantly.”

The central bank, for its part, did not say for certain whether the last interest rate cut already marked the end of its easing cycle.

BSP earlier stressed that “its resolve to provide support to economic activity to the extent that the inflation outlook allows.”

On the other hand, however, it noted that “considerable” monetary stimulus was in place, and the impact of expansionary fiscal policy was already in the pipeline.

Policymakers reiterated the same tune, with Deputy BSP Governor Diwa Guinigundo saying that economic growth “continues to be a challenge”, but at the same time warning that any signs of early recovery would warrant an exit strategy.