Another interest rate cut looms

MANILA, Philippines — After cutting policy rates by 25 basis points Thursday, the Bangko Sentral ng Pilipinas (BSP) may slash rates anew before the end of the year and set the pace for more cuts in the reserve requirements for banks, according to London-based Capital Economics.

In a report, the macroeconomy research firm said the rate cut was widely expected after the dismal second quarter economic growth performance of 5.5 percent.

“With inflation set to fall back further and growth only likely to stage a moderate recovery over the coming months, we expect another 25-basis point cut before the year is through,” Capital Economics said.

Capital Economics expects the central bank to slash rates anew in its meeting in November.

It noted that while the economy can be expected to recover in the second half of the year, growth is expected to be modest and as such, support must be provided to sustain growth.

The firm has also downgraded its full-year growth expectations for the economy to 5.8 percent from its earlier forecast of six percent.

With regards to any further cuts in the reserve requirement ratio (RRR) for banks, Capital Economics expects the central bank to hold fire for a few months as it observes the impact of the previous 200 bps of cuts to the RRR this year.

“The BSP noted that it hadn’t seen much evidence of the extra liquidity making its way into increased bank lending or broad money growth in the June data, but had anecdotal evidence of more of an impact in July,” it said.

But with inflation seen to fall below the government’s target of two up to four percent, the firm said  the BSP can be expected to lay out another 200 basis points cuts in the RRR outside of a regular monetary policy meeting sometime in the fourth quarter.

“Rice prices have continued to fall and are likely to remain under downward pressure from the lifting of import quotas. Meanwhile, fuel prices are set to remain low on the back of lower global oil prices. As last year’s spikes in both price categories enter the annual comparison in September and October, year-on-year inflation in the two commodities, which are heavily weighted in the CPI basket, is set to decline steeply,” Capital Economics said.

Slower economic growth as a result of weakening consumption will also keep a lid on price pressures, the firm said.