BSP to resume easing cycle; 50 bps rate cut seen

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to resume its easing cycle in the first half of 2020 with two rate cuts for a cumulative reduction of 50 basis points, according to German financial services company Deutsche Bank.

In a report, Deutsche Bank economist for Asia Vaninder Singh said the BSP still has space to ease further, with inflation likely to keep running in the lower half of the monetary authority’s target band of two to four percent over 2020.

The German bank sees inflation picking up slightly to 2.6 percent in 2020 and 3.5 percent in 2021 from the projected 2.5 percent. Inflation averaged 2.5 percent from January to November after accelerating to a four-month high of 1.3 percent in November from a 43-month low of 0.8 percent in October.

“However, we expect likely peso pressure to pass-through more strongly to inflation over 2021 and for this to show through in policy settings at that time,” Singh said.

Likewise, Deutsche Bank said the BSP is also expected to further reduce the level of deposits banks are required to keep with the central bank by another 200 basis points this year.

The BSP has committed to bring down the ultra high reserve requirement ratio to single digit level by 2023 from 20 percent in 2018. The level has been reduced by 600 basis points over the past two years, freeing up more liquidity into the financial system to boost economic activity.

“We expect the BSP to cut its policy rates by 50 basis points in the first half of 2020 and reduce the RRR rate by a further two percentage points,” Singh said.

These cuts will take the RRR to 12 percent by end 2020 as the central bank continues its bid to reach single-digit levels by mid-2023.

“This additional liquidity – including from the four percentage points cuts undertaken in 2019 is likely to show up in rebounding credit growth and rising asset valuations in the coming quarters – and, in turn, in inflation down the road,” he said.

According to Deutsche Bank, Philippine economic growth may accelerate to 6.1 percent in 2020 and 6.4 percent in 2021.

“The Philippines story will turn entirely on the back of the infrastructure spending over the next couple of years. Growth is likely to improve in 2020 to above six percent from under six percent expected in 2019 due to investments accelerating to over 15 percent in 2020 from -3.5 percent likely in 2019,” Singh said.