Up to 50 bps rate cut seen this year

MANILA, Philippines — Economists expect at least two rate cuts as well as a further reduction in the level of deposits banks are required to keep with the Bangko Sentral ng Pilipinas (BSP) this year.

Robert Dan Roces, chief economist at Security Bank Corp., said the central bank’s Monetary Board could slash policy rates by 25 to 50 basis points in the second half amid easing inflation.

“For interest rates, we also maintain that the BSP may cut policy rate by 25-50 basis points by the second half,if at all, and if inflation falls and remains for one to two quarters within the extreme lower to mid-band of the target range,” Roces said.

With a more favorable external backdrop and more dovish turn from other central banks, Roces said the BSP could afford to cut rates but would not be in a hurry to do given the positive trajectory.

Roces said the bank still expects a reduction in the reserve requirement ratio (RRR) during an off-policy meeting beginning with 100 basis points on the back of implied caution by the central bank and a data feedback loop on the effects of the cut to liquidity conditions and inflation.

ANZ Research chief economist Sanjay Mathur said the BSP would cut benchmark rates by 75 basis points star-ting May when inflation dips closer to the midpoint of the central bank’s two to four percent target.

“Overall, we believe that the BSP is progressively becoming comfortable with the evolving inflation scenario. We concur with this comfort,” Mathur said.

ANZ Research expects the BSP to resume the reduction of the RRR by at least 200 basis points this year.

HSBC economist Noelan Arbis said the BSP is seen slashing the RRR by 300 basis points as well as interest rates by 25 basis points within the year.

“We believe the order of monetary easing matters, at least in the beginning. We expect  RRR cuts to take precedence over interest rate cuts. We forecast 100 bps of RRR cut followed by a 25 bps cut to the policy rate in 2Q,” Arbis said.

Arbis said the BSP struck a neutral tone last Thursday by keeping interest rates steady, showing caution that inflation remains a risk while exhibiting patience over the timing of future monetary accommodation.

 “This is a welcome stance. As we noted previously, we believe it would be most prudent for the BSP to wait until inflation is more firmly within its target before engaging in any monetary accommodation,” Arbis said.

Easing inflation has allowed the BSP’s Monetary Board to keep interest rates unchanged for the third straight rate-setting meeting since December. Inflation has eased to 3.8 percent in February after peaking at 6.7 percent in September and October.

Inflation accelerated to 5.2 percent last year from 2.9 percent in 2017, exceeding the BSP’s two to four percent target, due to elevated oil and food prices as well as weak peso.

This paved the way for a tightening episode wherein the BSP’s Monetary Board jacked up interest rates by 175 basis points in five straight rate-setting meetings from May to November to prevent inflation from spiralling out of control.

The central bank kept interest rates steady during the first rate-setting meeting of Benjamin Diokno as BSP governor and Monetary Board chairman last March 21.