BSP rate cut may not be the last this year

MANILA, Philippines - The move by the Bangko Sentral ng Pilipinas (BSP) to slash key rates last Thursday may not be the last one as global economic woes persist, an investment bank said.

“Going forward, our view is that central bank action will be data dependent. However, with the risks to global growth still on the downside, another interest rate cut is likely, especially given continued capital inflows,” Barclays Capital regional economist Prakriti Sofat said in a research note.

Citing manageable inflation and the need to support growth, BSP trimmed benchmark rates by 25 basis points to a new record low of 3.5 percent and 5.5 percent for overnight borrowing and lending, respectively.

That was the fourth time the central bank slashed rates after similar moves in January, July and September. The last policy meeting for the year will be on Dec. 13.

 “While we agree that domestic demand is holding up, we think that the challenging external environment and spill-over to domestic demand implies that growth will slow in (second half of) 2012, down from 6.1 percent in (the first half of) 2012,” Sofat said.

Barclays has forecast five-percent growth for the second semester, falling at the lower-end of the government’s five to six-percent forecast.

Another reason to cut rates will be capital flows which could make peso stronger, Sofat said. The local currency, whose strength has been blamed for lower export earnings, has appreciated by roughly six percent against the dollar since the last trading day of 2011.

In announcing BSP’s decision last Thursday, BSP Deputy Governor Diwa Guinigundo also did not rule out further monetary easing.

“We have to see what happens to the growth rate of the economy at the third quarter. We have more data that will be providing us additional arguments for keeping, reducing policy rates further that will tell us the durability of economic growth and the definitive path of inflation,” Guinigundo explained.

 “In short, the decision to cut rate does not in any way tell us that it is the end of our easing cycle or it has just begun,” he said.

In September alone, government’s disbursements – net of interest payments – increased to P116.029 billion, 19.6 percent higher than the P97.003 billion spent a year ago.

The Aquino administration is stepping up efforts to fix the country’s fiscal position through a combination of higher revenues, increased spending and debt liability management.

Fiscal authorities said the government’s fiscal space remains wide, giving it more room to accelerate spending. The government has been trying to step up spending to boost economic growth which is targeted to hit anywhere from five percent to six percent this year.

The government has a budget deficit ceiling of P279 billion this year or 2.6 percent of gross domestic product (GDP) from the actual P197.8 billion recorded last year.