As economy slows, another rate cut looms — DBS

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) appears inclined to trim interest rates by 50 basis points this year as it unwinds its monetary tightening.

Masyita Crystallin, economist for the Philippines and Indonesia at DBS Bank, said the slower growth momentum and easing inflation have provided room for the central bank to unwind last year’s monetary tightening with a combination of both policy rate cut and the reduction of the reserve requirement ratio (RRR).

“We think a cumulative of 50 basis points this year is likely,” Crystallin said.

The Philippines posted its slowest gross domestic product (GDP) growth at 5.6 percent in the first quarter from the revised 6.3 percent in the fourth quarter.

She said the low growth was mainly due to the 2019 budget approval delay which also included a P95.3 billion cut in infrastructure spending as well as weak exports.

Crystallin said budget delay and infrastructure spending cut could impact negatively on growth as the economy has relied on public investment as the main driver of growth. In addition, this year’s El Niño and power outage also affected growth especially on agriculture and manufacturing sectors.

Although budget delay was mainly to blame for the lackluster growth, she said the impact of weakening trade balance to growth could not be ignored with the trade deficit widening further to $3.1 billion.

On the other hand, she added inflation has eased significantly so far this year and is likely to continue despite the El Niño weather condition and higher oil prices.

“Domestic demand might be more subdued than most expected as the impact of delayed budget and lower exports has outweighed the impact of lower inflation rate. We think inflation would ease further this year as domestic demand remains soft and food price are stable. These two factors combined might outweigh the impact of higher oil price,” Crystallin said.

Despite the expected rate cuts, the economist said the policy rate of the Philippines at 4.25 percent by the end of the year would still be higher than its peers.

Analysts are expecting the peso to weaken against the US dollar after the BSP has turned dovish.

“Our response to that argument is that peso doesn’t have to and in fact, we expect the Philippine peso to continue to outperform emerging market Asia currencies. Fundamentally, peso’s drivers are also more idiosyncratic or domestic-driven. If inflation continues to moderate and stabilize within BSP’s two to four percent target range, we don’t see a strong case for significant peso depreciation,” Crystallin said.

Markets seem to be reacting quite positively to the impending easing as BSP is not expected to fully unwind 2018 rate hikes. Additionally, easing could help to offset the drag that has come from the budget.