BSP seen slashing key rates anew

MANILA, Philippines - Monetary authorities could slash key rates again within the year as inflation would likely settle within the target of the Bangko Sentral ng Pilipinas (BSP), Japan’s largest investment bank said.

“In our baseline, we see scope for one more 25-basis point cut this year, bringing the policy rate to 3.50 percent,” Nomura International Ltd. said in its special report for Asia.

“The rate cut suggests that BSP is likely to cut again, provided it remains comfortable with the inflation outlook,” it added.

BSP’s policy-making Monetary Board, in its last meeting on July 26, cut rates by 25 basis points to new record-lows of 3.75 and 5.75 percent for overnight borrowing and lending, respectively, citing the need to support domestic growth amid a fragile world economy.

It was the third cut for the year, following similar moves in January and March, as BSP expects inflation to be benign throughout the year, forecasting a 3.1 percent uptick in consumer prices for 2012. Inflation stood at that level for the first seven months.

In three scenarios it presented, Nomura said inflation could be triggered by “pending electricity tariff adjustments” and food price increases.

In its baseline scenario, which takes into account a strong domestic demand that is likely to offset weakening global economy, Nomura said inflation could rise “gradually” due to pressures from higher electricity prices. Under this scenario, it expects inflation to average 3.4 and 3.7 percent in the third and fourth quarter, respectively.

Meanwhile, a modest global growth would likely add up to a steady domestic demand and push consumer price growth to 3.5 percent in the third quarter and even exceed BSP’s target to end at 5.4 percent in the last three months of the year.

“We would expect headline inflation to rise to an average of 5.4 percent over the next 12 months as rising food and energy costs… add to existing domestic inflationary pressures, including those from still-tight labor markets,” the report said.

Inflation could, however, slow further to 2.4 percent in the fourth quarter, Nomura said, if a global recession actually happens.

In these three scenarios, the investment bank expect BSP’s target to be met. “While we expect inflation to edge higher in the (second half), it will likely remain within BSP’s full year target of three- to five-percent,” it said.

In its second quarter inflation report released last Friday, BSP said there is still “room for policy support” should the global economy deteriorates further.