Chidu Narayanan, economist at Standard Chartered Bank, said the BSP would likely reduce interest rates by another 75 basis points this year after the initial 25-basis points cut on May 9.
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BSP may further cut interest rates
Lawrence Agcaoili (The Philippine Star) - July 22, 2019 - 12:00am

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to slash interest rates two to three more times this year on the back of the continued inflation downtrend as well as slower economic growth.

Chidu Narayanan, economist at Standard Chartered Bank, said the BSP would likely reduce interest rates by another 75 basis points this year after the initial 25-basis points cut on May 9.

“We expect inflation to fall below two percent in the second half, giving the central bank more room to cut policy rates further. We see another 75 basis points of rate cuts this year, following an initial cut in May,” Narayanan said.

This would take total rate cuts in 2019 to 100 basis points as BSP responds to lower inflation and softening growth. This would partly reverse the 175 basis points of hikes it delivered last year as inflation kicked up to 5.2 percent from 2.9 percent in 2017 and exceeded the BSP’s two-to-four percent target range due to elevated oil and food prices as well as weak peso.

According to Narayanan, Standard Chartered Bank expects inflation to drop below two percent in the third quarter and would remain below two percent until December.

“We forecast that inflation will slow further for the rest of 2019. The high base from 2018, along with the fading of one-off boosts from tax reforms and poor weather, will continue to weigh on inflation,” Narayanan said.

He said food inflation that accounts for close to 50 percent of headline inflation last year would continue to moderate this year with the passage of the rice tariffication bill that would help offset the impact of stronger-than-expected El Niño impact.

Narayanan said policy rate cuts, along with the reserve requirement rate cuts, should support credit growth for the rest of the year.

The BSP reduced the level of deposits banks are required to keep with the central bank by 200 basis points for big and mid-sized banks and 100 basis points for small banks to free up P210 billion in additional liquidity into the financial system.

Standard Chartered Bank said the country’s gross domestic product (GDP) growth would hit 6.1 percent despite the easing of the expansion to a four-year low of 5.6 percent in the first quarter due to the delayed passage of the 2019 national budget.

For his part, ING Bank Manila senior economist Nicholas Mapa said inflation is expected to hover at around three percent this year and next year after accelerating to 5.2 percent last year.

Mapa said price pressures appear to be under control and given the dovish outlook for the US Federal Reserve, the BSP may slash interest rates by 50 basis points in the third quarter and further trim the RRR level.

“We expect Governor (Benjamin) Diokno to slash borrowing costs further in the third quarter, possibly by an additional 50 basis points either with a pair of 25 basis point cuts in August and September or a 50 basis points rate reduction in August.  Meanwhile, we expect the BSP to trim RRR in a phased manner to close out the year in order to help alleviate somewhat tight liquidity conditions in financial markets,” Mapa said.

BANGKO SENTRAL NG PILIPINAS
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