Economists see rate cut this week

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may further ease the country’s monetary policy settings through another 25-basis points rate cut this week as the economy continues to find its way back to higher growth, according to economists.

Noelan Arbis, economist at British banking giant HSBC, said the fast declining inflation provides room for an earlier rate cut by the BSP.

HSBC earlier expected the next rate cut by the BSP to come in the fourth quarter.

Inflation averaged three percent in the first eight months after easing to 1.7 percent in August from 2.4 percent in July due to easing oil and food prices as well as a stronger peso.

“This prompts us to move our policy rate cut forecast earlier from the fourth quarter, but our trajectory remains the same. We now expect the BSP to cut its policy rate by 25 basis points on Sept. 26,” Arbis said.

The BSP has so far slashed interest rates by 50 basis points this year due to easing inflation and slower-than-expected economic growth in the first half of the year.

Arbis said the central bank is likely to slash interest rates by another 25 basis points in the first quarter of next year.

Arbis said the economy is turning around from its below-trend growth in the first half as government spending has started to pick up, exports have turned positive, and consumer sentiment has turned more upbeat.

The country’s gross domestic product (GDP) growth averaged 5.5 percent in the first half, lower than  the six to seven percent target set by economic managers, due to the soft global market as well as the delayed implementation of the 2019 national budget.

According to Arbis, the rationale for the rate cuts is slowly broadening from supporting growth to also normalizing interest rates.

“Governor Diokno has also vowed to normalize interest rates after last year’s inflation driven tightening, as real interest rates in the Philippines are now the highest in Asia,” Arbis said.

The HSBC economist said the central bank is likely to further lower the reserve requirement ratio by another 100 basis points in the fourth quarter. The BSP has already lowered the level of deposits banks are required to keep with the central bank by 400 basis points since last year.

ING Bank economist for Asia Prakash Sakpal said the BSP is may deliver its third rate cut for the year due to the sharp slide in inflation last August.

“Latest data from the Philippines shows a sharp slide in consumer price inflation in August below the central bank’s two to four policy target which set another 25 basis points rate cut in stone – the third this year taking the BSP’s overnight borrowing rate to four percent,” Sakpal said.

The economist of the Dutch financial giant said both the BSP and Bank Indonesia are enjoying significant policy space from 175 basis points of rate hikes last year.

“We don’t think the BSP will need to use up all that policy leeway going forward unless pent-up government spending fails to revive GDP growth above six percent in the second half of 2019,” Sakpal said.