Bangko Sentral seen to cut policy rates by another 25 basis points

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) is widely expected to cut its policy rates by another 25 basis points this Thursday, rounding up what the market said could be the last of the series of rate cuts that started in December last year.

The Monetary Board (MB) is scheduled to conduct its regular policy-setting meeting this week amid declining inflation rate, benign money supply growth and an impending economic recession.

With the real gross domestic product (GDP) actually declining by 2.3 percent in the first quarter, monetary officials have to contend with the need to support growth while keeping a tame domestic liquidity expansion.

The BSP said, however, that it expected the inflation rate to continue dropping to 1.2 percent in June and the market is actually expecting the rate to drop even more.

Banking giant Development Bank of Singapore (DBS) said yesterday that it was estimating consumer price inflation to have jumped to 0.7 percent month-on-month in June.

DBS said this would have been due to fuel prices since pump prices were raised several times during the month, after Dubai crude oil prices rose a further 12 percent from May.

“After accounting for the slippage in the peso, crude oil prices were actually up by some 14 percent,” DBS said.

But in annual terms, DBS said inflation would have slowed down in June compared to a year ago, with June oil prices still significantly lower at $72 per barrel against nearly $137 per barrel last year.

“This will push inflation to 1.6 percent year-on-year from 3.3 percent in May, in line with consensus estimates,” DBS said.

Despite the jump in sequential inflation, DBS said the BSP would probably deliver another interest rate cut on Thursday.

“Such would take the overnight reverse repo and repo rates (central bank borrowing and lending rates) to be trimmed by 25 basis points, to four percent and six percent respectively,” DBS said.

According to DBS, Thurs-day’s monetary policy easing would mean a slightly extended rate-cut cycle relative to rest of the region since most of Asia’s central banks have already paused policy-wise.

But DBS said it would reflect the fact that the Philippines had a more vulnerable economic outlook.

Prior to the last policy meeting, DBS noted that the country had reported a disappointing 2.3-percent quarterly drop in GDP, the largest decline since at least 1989.

DBS said this came even as most other economies in the region either reported smaller contractions, or sequential improvements, in real GDP. “Disconcertingly, the breakdown of the data also showed an economy weighed down not so much by weak exports, but by extremely weak consumer spending,” DBS said.

The bank said the scant data since then have not pointed to any clear rebound in the latter – as of April, the seasonally adjusted trend on remittances is still looking flat at best, while imports fell sequentially for a second straight month.