Further rate cuts expected as Philippines struggles with recovery

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) can be expected to slash interest rates further next year as the pace of recovery remains weak, Capital Economics said.

In a report, the London-based think tank said the economic scars from the downturn, which include business insolvencies, weak household consumption and high unemployment, would weigh heavily on demand for many months to come, necessitating the need for further support to the economy.

The BSP slashed interest rates by 25 basis points on Thursday, the first easing since June, taking the policy rate to an all-time low of just two percent following the still steep decline in economic output in the third quarter.

The economy declined at a slower pace of 11.5 percent in the third quarter coming off the record 16.9 percent contraction in the second quarter when stricter lockdowns were imposed.

“With the virus still not under control, restrictions will need to remain in place for longer, which will further hold back the recovery. Promising news on vaccine development looks unlikely to change the situation in the near term,” said Capital Economics.

“The Philippines is in talks with a number of manufacturers, but has not yet made any pre-orders. It is likely to be towards the back of the queue when vaccines are rolled out,” it said.

Capital Economics expects the economy to contract by 9.5 percent this year and grow by 10.5 percent in 2021, which would still leave economic output at 10 percent lower compared with the pre-crisis trend.

“Given the likely weakness of the economic recovery, we suspect the BSP will cut rates further next year,” it said.

Inflation is so far, not a barrier to further easing with the headline rate of 2.5 percent in October staying below the mid-point of the BSP’s target band of two up to four percent.

“The weakness of the economy will keep price pressures subdued over the coming quarters,” said Capital Economics.