BSP may resume cutting policy rates next year

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) can be expected to resume cuts in policy rates in 2020 after declaring last week the end of monetary easing for this year, said London-based Capital Economics over the weekend.

In a research brief, the macroeconomy research firm said the economy would still need support as growth could be expected to remain weak next year.

“BSP Governor Benjamin Diokno was pretty emphatic earlier this week when he said that the central bank had ‘absolutely’ ‘done more than enough’ this year. In response we are taking out the interest rate cut we originally had pencilled in for December,” the firm said.

“But with growth likely to come in below the government’s target and inflation set to remain very low, we still expect more easing in 2020,” it added.

On Friday, Capital Economics said the acceleration of economic growth in the third quarter of the year may be sustained next quarter, but not next year because of the tough external environment that may weigh down exports, as well as the unchanged budget deficit for next year.

“While growth is likely to see another pickup in the fourth quarter, we expect it to settle at around six percent next year,” it said.

Economic growth – as measured by the gross domestic product (GDP) – accelerated to 6.2 percent in the third quarter, in line with market expectations.

This was faster compared to the 5.5 percent GDP growth in the second quarter and six percent in the third quarter of 2018.

This brings the year-to-date average to 5.8 percent,  which is slightly below the lower end of the government’s full-year growth target of six to seven percent.

This means the Philippine economy will have to expand by at least 6.7 percent in the last quarter of the year to meet the lower end of the growth target of six up to seven percent.

“Inflation is unlikely to stand in the way of more easing. The headline rate was just 0.8 percent year-on-year in October and is likely to remain below the mid-point of the BSP’s two up to four percent target for most of next year,” said Capital Economics.

“We have pencilled in a further 50 basis points of cuts in 2020,” it added.