‘Another rate cut looms in 1st half’

MANILA, Philippines — Economists expect the Bangko Sentral ng Pilipinas (BSP) to step on the accelerator pedal of its easing episode by slashing interest rates by another 25 basis points within the first half.

Nicholas Mapa, senior economist at Dutch financial giant ING Bank Manila, sees the  BSP  carrying out a second rate cut as early as May amid a benign inflation environment

“The still benign inflation outlook affords the central bank proper scope to continue easing monetary policy with (BSP Governor Benjamin) Diokno primed to carry out a second rate cut sometime within the first half of the year,” Mapa said.

Mapa said Diokno had previously telegraphed up to 50 basis points worth of policy easing this year.

According to ING Bank, the BSP’s Monetary Board opted to carry out a preemptive rate cut citing the impending slowdown owing to the ongoing  novel coronavirus (nCoV) outbreak.

Based on preliminary estimates by the BSP, the virus outbreak could shave up to 0.3 percentage point to gross domestic product (GDP) growth this year, with 0.2 percentage point in the first quarter and 0.4 percentage point in the second.

Meanwhile,  ANZ Research economist Mustafa Arif expects  the central bank to likely further slash interest rates in the second quarter.

“For now, we expect the BSP to undertake one additional 25 basis points cut this year, likely in Q2. However, a greater-than-expected impact from the coronavirus may extend the easing cycle further,” Arif said.

For its part,  Fitch Solutions Macro Research expects  the Philippine central bank to maintain a dovish stance over the coming quarters, given the downside shock to the economy expected in the first quarter.

“We believe that the nCoV outbreak poses both economic and disinflationary risks, which will prompt the BSP to cut again in H1,” Fitch Solutions said.

However, the research arm of the Fitch Group said the extent to which the BSP decides to ease further would depend on the speed in which the economy recovers from the virus setback and the trajectory of credit growth over the coming quarter.

“We had anticipated the BSP to deliver an insurance cut in 2020 to help support the economic rebound, with growth having slowed to 5.9 percent in 2019, from 6.2 percent in 2018,” Fitch Solutions said.
This will bring the total easing cycle to 125 basis points since May 2019, partially unwinding the 175 basis points rate hikes as part of a tightening cycle in 2018, alongside the 400 basis points reduction in the reserve requirement ratio for big and mid-sized banks and 200 basis points for small banks.

Mapa, however, said the BSP would likely shelve plans to further lower the level of deposits banks are required to keep with the BSP as only 30 percent of the P450 billion additional liquidity released into the financial system had been channeled to the productive sectors.

 “Thus we expect RRR reductions to be pushed back, likely to the second half,” Mapa said.

The BSP has committed to reduce the RRR level to single digit level by the middle of 2023 to free up much needed funds to boost economic activity.