BSP seen resuming rate cuts

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is seen to resume its easing cycle after it decided to keep interest rates unchanged Thursday.

Chidu Narayanan, economist at Standard Chartered Bank, expects the BSP’s Monetary Board to slash benchmark rates in August and September due to easing inflation, slower lending growth, and weaker economic expansion.

“We expect inflation to drop below the bottom of BSP’s two to four percent inflation target. Declining inflation, subdued credit growth and a soft growth outlook are likely to support further easing from BSP. We expect further rate cuts at BSP’s August and September meetings,” Nara-yanan said.

Standard Chartered Bank expects the BSP to cut interest rates by 100 basis points this year after a tightening cycle that saw rates rise by 175 basis points as inflation shot up to 5.2 percent last year from 2.9 percent in 2017 due to elevated oil and food prices as well as a weak peso.

Inflation eased to 3.6 percent in the first five months despite the slight uptick to 3.2 percent in May from three percent in April.

ING Bank Manila economist Nicholas Mapa said BSP opted to keep rates steady  last June 20 to stay data dependent with moves engineered by evidence.  

“If inflation shows that it will indeed revert to its downward path and if signs point to still anemic growth despite the initial stimulus from both the monetary and fiscal side, we could see BSP slashing policy rates further in the third quarter to help reverse 2018’s aggressive rate hike cycle,” Mapa said.

Mapa said the Monetary Board now expects a lower inflation of 2.7 percent instead of 2.9 percent for this year and three percent instead of 3.1 percent for next year.

After slashing interest rates by 25 basis points last May 9, the BSP decided to reduce the reserve requirement ratio for big banks by 200 basis points in three tranches until July 26 and for small banks by 100 basis points last May 31.

The reduction of the level of deposits banks are required to keep with the centra bank would free up P210 billion into the financial system to boost economic activity after the gross domestic product (GDP) eased to a four-year low of 5.6 percent in the fourth quarter from 6.3 percent in the fourth quarter due to the delayed passage of the 2019 national budget.

“With the Fed in holding pattern overnight, the BSP decided to await further validation on its inflation path, more evidence of the fallout from the global trade war and lastly see how 2Q GDP growth stacks up against the first quarter,” Mapa said.

Sanjay Mathur, chief economist for Southeast Asia and India at ANZ Research, said the BSP is seen cutting interest rates further in August and November after a prudent pause to allow authorities to first assess the earlier rate and RRR cut on the real economy.