BSP chief hints of new round of rate cuts

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is not done yet with its easing episode as it expects another rate cut either toward the end of the third quarter or early fourth quarter.

In an interview over Bloomberg TV, BSP Governor Benjamin Diokno said another 25 basis point cut is possible in the next six weeks.

The BSP’s Monetary Board sets the country’s appropriate monetary policy stance every six weeks based on the recommendation of an advisory committee to enable the central bank to achieve the desired inflation target.

 The BSP formally adopted inflation targeting as the framework for monetary policy in January 2002. This provides BSP with a more focused and forward-looking approach in the pursuit of its primary mandate of ensuring price stability.

The Monetary Board slashed interest rates by 25 bps last Thursday amid the continued downtrend in inflation as well as the slower-than-expected gross domestic product (GDP) growth in the second quarter.

Inflation eased to a 31-month low of 2.4 percent in July from 2.7 percent in June, bringing the average to 3.2 percent in the first seven months of the year or well within the BSP’s two percent to four percent target.

On the other hand, the GDP booked its slowest expansion in 17 quarters at 5.5 percent in the second quarter from 5.6 percent in the first quarter due to the delayed passage of the 2019 national budget.

Diokno said benchmark rates could further be reduced early in the fourth quarter if it is left untouched in the next rate setting meeting scheduled on Sept. 26.

By the end of the year, the  Monetary Board is also seen to further slash by 100 bps the level of deposits banks are required to keep with the central bank.

After slashing interest rates by 25 bps last May 9, the BSP decided to keep rates steady to assess the impact of previous monetary policy actions.

This included the reduction of the reserve requirement ratio of big banks by 200 bps in three tranches that took effect by 100 bps last May 31, 50 bps last June 28, and another 50 bps last July 26.

The RRR for small banks was also reduced by 100 bps last May 31.

The move released more than P200 billion into the financial system to support the country’s growing economy. It is also part of the commitment made by the late BSP governor Nestor Espenilla Jr. to bring down the level to single digit by 2023.

Based on its latest assessment, the Monetary Board sees inflation averaging 2.6 percent instead of 2.7 percent this year and 2.9 percent instead of three percent for next year. It pegged its forecast for 2021 at 2.9 percent.

Monetary authorities lifted rates by 175 bps between May and November last year to prevent inflation from spiraling out of control. Inflation kicked up to 5.2 percent last year from 2.9 percent in 2017 and exceeded the two percent to four percent target due to elevated oil and food prices as well as weak peso.

Mustafa Arif, economist at ANZ Research, said the BSP’s Monetary Board is likely to slash interest rates by another 25 bps in the fourth quarter due to easing inflation.

HSBC economist Noelan Arbis said the British banking giant expects the BSP to further slash interest rates by 25 bps in the fourth quarter and by another 25 bps in the first quarter of next year as inflation stays moderate and is expected to fall below the BSP’s two percent to four percent range by September.

Arbis said the BSP is also likely reduce the RRR level by 100 bps before the end of the year as the growth in bank lending and liquidity continued to slow amid the RRR reduction.