More interest rate cuts loom

MANILA, Philippines  — Economists expect further monetary easing from the Bangko Sentral ng Pilipinas (BSP) after authorities delivered a surprise 50-basis point interest rate cut last Thursday to  further mitigate the downside risks to growth in anticipation of a more disruptive coronavirus disease 2019 pandemic.

Noelan Arbis, economist at British banking giant HSBC, sees another 25 basis points cut  in the fourth quarter given growth risks to the Philippine economy.

Arbis said the BSP’s Monetary Board is more likely to pause in the coming months to assess the full impact of rate cuts on the economy.

“This means that the policy rate may remain steady throughout Q3 2020, when there is only one scheduled meeting for August,” Arbis said.

Arbis said the potential for a slow economic recovery in the second half from the delayed passage of the fiscal stimulus and a continuing rise in COVID-19 cases makes it more likely that the BSP would have to cut again.

“We now expect another 25 basis points cut in Q4, bringing the reverse repo rate to two percent by year-end,” Arbis.

He also expects the BSP  to slash the reserve requirement ratio by another 200 basis points within the year.

Fitch Solutions Country Risk & Industry Research said the BSP may seek to cut further if their expected increase in fiscal stimulus fails to materialize as the Philippine economy also risks a much deeper slump with a gross domestic product contraction of two percent in the second quarter from 0.2 percent in the first quarter.

Fitch Solutions said the BSP has sought to front-load rate cuts given the delayed impact on credit conditions and the Monetary Board is likely to hold-off further cut to its policy rate this year.

“That is not to say that further easing will not come, in fact we expect the BSP to turn to its other tools to ensure the economy recovers and credit conditions are supportive,” the research arm of the Fitch Group said, referring to another 200 basis points cut in the RRR to 10 percent in the second half.

ANZ Research economist Kanika Bhatnagar said the BSP was likely to keep interest rates on hold in the third quarter. The next rate-setting meeting of the Monetary Board is  on Aug. 20.

The BSP has so far slashed interest rates by 175 basis points to an all-time low of 2.25 percent, including the surprise 50 basis points cut on Thursday.  The move is intended  to boost market confidence and cushion the impact of the COVID-19 pandemic.

The COVID-19 measures including the lowering of the RRR for big banks, the P300-billion repurchase agreement with the Bureau of the Treasury, the purchase of government securities in the secondary market, among others have unleashed P1.6 trillion into the financial system.

Economic managers expect the country’s GDP  to contract by two to 3.4 percent this year, ending more than two decades of positive growth.