‘Early rate cut to boost economy’

MANILA, Philippines — Interest rate cuts in the second half will likely boost economic and investment activity in the Philippines, providing some relief to borrowers who have been bearing the weight of restrictive monetary policy, according to ING Bank.

ING Bank Manila senior economist Nicholas Antonio Mapa said it appears that the Bangko Sentral ng Pilipinas (BSP) would likely lower borrowings costs sometime in the second half.

“Policy easing from the BSP could help revitalize the economy and help deliver a sustainable pace of expansion while also paving the way for more robust expansion of productivity and capacity that could ensure we hit our growth targets over the next few years,” Mapa said in a research note.

The economist also said rate cuts sooner rather than later would finally bring some comfort to consumers and corporates who have been under the weight of restrictive monetary policy for more than two years.

Policy easing will also provide some reprieve to bond markets, which have faced uncertainty on both the domestic and global front.

“The equity market could also get a boost if such a move does indeed translate into faster and more broad-based growth with sectors outside financial institutions getting a lift,” Mapa said.

At its meeting last week, the BSP’s Monetary Board kept the benchmark interest rate at a 17-year high of 6.50 percent for a fifth straight meeting. This was after the central bank raised borrowing costs by 450 basis points from May 2022 to October 2023 to tame inflation and stabilize the peso.

However, BSP Governor Eli Remolona Jr. said the central bank could cut as much as 50 basis points in the second half this year, possibly starting in August.

He added that the BSP could also cut ahead of the US Federal Reserve.

According to Mapa, the shift in tone from the BSP chief was due to disappointing first-quarter gross domestic product (GDP) data and inflation coming in lower-than-expected in April.

“GDP growth missed the official target last year and could be headed for another miss this year as investment activity remains well-below pre pandemic levels,” he said.

The Philippine economy expanded by 5.7 percent in the first quarter, slightly faster than 5.5 percent in the previous quarter but still below the government’s six to seven percent goal.

Meanwhile, inflation accelerated for a third straight month to 3.8 percent in April from 3.7 percent in March. However, inflation remained within the two to four percent target of the BSP as it averaged 3.4 percent in the January to April period.

“The projected urgency to cut sooner rather than later would be done to reverse their restrictive stance after hiking rates twice in 2023 and then continue on to reduce rates again in December to match the projected Fed rate cut by the end of the year,” Mapa said.

However, the peso may take a hit from the Remolona’s dovish remarks, he said.

“The peso, which had been depreciating in-line with regional currencies previously, has now strayed into one of the currencies most under pressure in the region during bouts of dollar strength,” Mapa said.

“Most other emerging market central banks are signaling that they will be keeping rates untouched for the balance of the year, in stark contrast to BSP’s current guidance for potential cuts ahead of the Fed,” Mapa added.