Foreign think tank sees 25 bps cut

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may  bring the key interest rate  down  to 1.75 percent by year-end to support the economy amid the pandemic, according to London-based macroeconomy research firm Capital Economics. 

In a report, the think tank said the BSP may cut the main policy rate by 25 basis points in its meeting on Thursday, taking it down to two percent. 

“We have pencilled in a 25-basis point rate cut at the bank’s Thursday meeting, We also expect an additional cut before the year is through, which would take the policy rate to 1.75 percent by year end,” Capital Economics said.

The BSP left its main policy rate on hold at 2.25 percent – the lowest in record – during its last meeting in August in a “prudent pause” to allow previous rate cuts to work their way into the economy. 

BSP Governor Benjamin Diokno said last week that the central bank may keep the country’s accommodative monetary policy stance to help the economy recover from the impact of the pandemic. 

Banks and other lenders benchmark their loans and deposit rates against central bank interest rates. 

Capital Economics said the economy can use more support as recovery is “lagging behind almost everywhere else in the region.” 

“We estimate that output is still around 10 percent below its pre-crisis level. The lackluster fiscal response from the government  puts more pressure on the central bank to do more,” Capital Economics said. 

It also said that the government’s slow fiscal response has likely caused lasting damage to the economy in the form of higher unemployment and increased bankruptcies. 

“Distribution of the support has been the problem. Local governments have experienced difficulties identifying people who qualify for benefits, which has led to delays,”   it said.  

The firm noted that inflation is so far not an impediment to policy easing.  The headline rate dropped back in August, to 2.4 percent, and is comfortably in the bottom half of the BSP’s two  to four percent target range. 

“Subdued economic activity is set to continuing weighing on prices pressures in the months ahead,”  Capital Economics said.