Another 25-basis-point rate cut seen this year

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may deliver another 25-basis-point rate cut this year amid the benign inflation environment, as well as the slow recovery from a deep economic hole caused by the   pandemic, according to S&P Global Ratings.

In a report, the debt watcher said another rate cut by the Monetary Board this month would bring the benchmark rate at an all-time low of 1.75 percent.

“Inflation remains high relative to how much domestic activity has fallen, in part due to the supply-side disruptions from recent typhoons. But with growth so low, we continue to pencil in one last rate cut from BSP after this month’s move, before a long pause,” S&P said.

The last rate-setting meeting of the BSP for this year is scheduled on Dec. 17.

The credit rating agency sees inflation climbing to 2.8 percent this year and three percent next year from 2.5 percent last year. Inflation averaged 2.5 percent from January to October.

Based on the latest assessment of the Monetary Board, inflation may average at 2.4 percent this year and 2.7 percent next year.

To soften the impact of COVID-19 on the economy, the BSP has been doing the heavy lifting via response measures that unleashed P1.9 trillion into the financial system to revive the pandemic-stricken economy.

Aside from the cumulative 200 basis points rate cut that brought the overnight reverse repurchase rate at an all-time low of two percent, the central bank has also lowered the reserve requirement ratio for banks, extended a P540 billion provisional advance to the national government, entered into a P300 billion repurchase agreement with the Bureau of the Treasury settled last Sept. 29, purchased government securities in the secondary market, among others.

S&P expects the Philippie economy to contract by 9.5 percent this year before bouncing back strongly with a growth of 9.6 percent next year.

“We keep our GDP growth forecast for this year and next unchanged. As before, the base-effect-driven high growth rates for the upcoming years mask the fact that the level of GDP will remain far below the pre-COVID trend even by the end of our forecast horizon,” it said.

S&P cited the country’s small fiscal response that is only equivalent to 2.3 percent of GDP.

“We expect a boost from fiscal impulse in the second half of next year if key infrastructure projects start to ramp up again,” it said.

For Asia-Pacific, S&P sees the region’s GDP contracting by two percent this year before bouncing back with a growth of 6.8 percent in 2021.

“The region will get back to pre-COVID activity levels only at the end of 2020. For the region excluding China, activity will not return to pre-COVID levels before the third quarter of 2021,” it said.