Expect a BSP rate cut by 2019 second quarter, says Nomura

MANILA, Philippines — Japanese investment house Nomura expects the Bangko Sentral ng Pilipinas (BSP) to cut interest rates within the second quarter.

Euben Paracuelles, economist of Nomura, said moderate upside risks to inflation has given the central bank more space to slash interest rates within the second quarter after a tightening cycle last year.

Paracuelles said Nomura’s scenario analysis suggests crude oil prices are a bigger risk to the inflation outlook than the El Niño phenomenon.

“This implies that these two factors represent relatively moderate upside risks to inflation, which may provide the central bank with scope to cut its policy rate in the second quarter, ahead of our baseline forecast of third quarter,” Paracuelles said.

Paracuelles said it would take a substantial rise in oil prices to an average of $90 per barrel for full-year 2019 headline inflation to breach the central bank’s two to four percent target because of favorable base effects.

Easing inflation has allowed the BSP to take a breather from its tightening episode wherein it lifted rates by 175 basis points in five straight rate-setting meetings from May to November last year to prevent inflation from spiralling out of control.

Inflation eased for five straight months to a 15-month low of 3.3 percent in March after peaking at 6.7 percent in September and October last year due to the tightening cycle complemented by non-monetary measures adopted by the government.

“This was below consensus expectations of 3.5 percent and our forecast of 3.4 percent and at the lower end of the range of 3.1-3.9 percent projected by the BSP,” Paracuelles said.

The economist said some of the decline could be explained by favorable base effects due to the tax reforms last year.

Inflation kicked up to 5.2 percent last year from 2.9 percent in 2017 and exceeded the BSP’s two to four percent range due to elevated oil and food prices as well as weak peso.

According to Paracuelles, Nomura expects the BSP to resume the reduction of the reserve requirement ratio or the amount of deposits banks are required to keep with the central bank.

“In addition, we think the case for a near-term cut in the RRR remains clear, given easing inflation and tighter liquidity conditions as indicated by interbank rates hovering near the top of BSP’s interest rate corridor,” he said.