S&P sees more BSP rate cuts

MANILA, Philippines — Debt watcher S&P Global Ratings expects more rate cuts from the Bangko Sentral ng Pilipinas (BSP) over the next two years amid the continued inflation downtrend and soft economic growth.

In a report, S&P said it expects the BSP to slash interest rates by 75 basis points this year and by 50 basis points next year.

“Meanwhile, we increased our policy rate hike expectations to 75 basis points this year and another 50 basis points in 2020,” the debt watcher said.

The BSP hit the pause button last June 20 to assess the impact of previous monetary actions including the reduction of benchmark rates by 25 basis points last May 9 as well as the lowering of the level of deposits banks are required to keep with the central bank.

The regulator slashed the reserve requirement ratio for big and mid-sized banks by 200 basis points in three tranches starting May 31 until July 26 and also lowered the ratio for small banks by 100 basis points last May 31.

The move is set to free up at least P200 billion in additional funds into the financial system to boost the economy.

The country’s gross domestic product (GDP) growth eased to a four-year low of 5.6 percent in the first quarter from 6.3 percent in the fourth quarter due to the delayed passage of the 2019 national budget.

Inflation averaged 3.4 percent in the first half and returned to the BSP’s two to four percent target after easing to a 22-month low of 2.7 percent in June from 3.2 percent in May.

“With 2019 growth starting off on the weak side, BSP rhetoric continues to hint at an easing bias. A relatively strong peso and lower inflation help this view, although the governor has recently stated that they would prefer to first study liquidity impact of the most recent reduction in reserve requirements to be able to time the next cut better,” S&P said.

The debt watcher expects a rebound in infrastructure investment in the second half to bring the overall 2019 fiscal impulse from negative to roughly neutral.

“We continue to expect GDP growth to come in at the low end of the six to 6.5 percent this year. The outlook for external demand is still uncertain and could exert downward pressure on investment for export-facing industries,” it said.

According to S&P, external risks including external financial and foreign exchange rate volatility as well as a sharp increase in short-term negative spillovers from the US-China trade war continue to narrow.

S&P expects the Philippines to post a slower growth of 6.1 percent this year before recovering to 6.4 percent next year and to 6.6 percent in 2021, while inflation is seen easing to three percent this year before rising to 3.2 percent in 2020 and 3.4 percent in 2021.