PREVIEW: Philippine central bank seen cutting rates by 25 bps amid easing inflation, gloomy GDP outlook

07, Aug. 2019

BSP Governor Benjamin Diokno during the announcement of the 25 basis point rate cut at the central bank’s May 9 meeting.
BSP Governor Benjamin Diokno during the announcement of the 25 basis point rate cut at the central bank’s May 9 meeting.

By Darlene Basingan

MANILA, NNA – The Philippine central bank is likely to cut interest rates at its policy meeting on Thursday as the country’s inflation continues to ease, with the economy projected to recover only slightly in the April-June quarter, economists said.

All of the seven economists, whose forecasts were compiled by NNA, see the Banko Sentral ng Pilipinas (BSP) cutting its interest rate again by 25 basis points to 125 basis points, or 4.25 percent.

The government will announce gross domestic product data for the second quarter Thursday morning, before the central bank’s policy meeting.

The BSP ended its policy tightening cycle at its May 9 meeting, when it trimmed its key lending rate by 25 basis points to 4.50 percent, the first rate cut in nearly three years.

The BSP had raised the benchmark rate by a total of 175 basis points last year to 4.75 percent to tame inflation.

Inflation dropped to a two-year low in July to 2.4 percent after hitting a 10-year high in 2018.

“The BSP rate cut will be driven by falling inflation, which is the normalization of what happened last year which gives the central bank the ability to cut by a quarter. So it gives them space,” Jonathan Ravelas, chief strategist of BDO Unibank Inc., said.

Economists also attribute the likely interest rate cut to anticipated slow recovery in the Philippines’ gross domestic product in the second quarter largely due to the government’s underspending as a result of the delayed passage of the 2019 national budget.

“The BSP is expected to cut 25 basis points to help prop up and support domestic economic activity,” Ruben Carlo Asuncion, chief economist of the UnionBank of the Philippines, said.

The U.S. Federal Reserve recently slashed its rates, which economists believe will also influence the BSP’s decision to cut its rates.

“The possible cut in local policy rates could also be supported by the widely expected cut in the U.S. Fed Funds Rate…as this will also provide some leeway (or) flexibility for other central banks around the world (including the Philippine central bank) to do a corresponding cut on their respective policy rates,” Michael Ricafort, economist at Rizal Commercial Banking Corp., explained.

BSP governor Benjamin Diokno recently signaled the central bank may cut rates but noted it will be data-dependent.

Most of the economists also expect the central bank to cut its rates by another 25 basis points to 4 percent by the end of the year, while one expects a 50 basis points cut in the third quarter of this year.

“Price pressures appear to be under control and given the dovish outlook for the Fed, we expect (BSP) governor Diokno to slash borrowing costs further in the third quarter,” Nicholas Mapa, senior economist at the ING Bank Manila, said in an emailed report.

Moving forward, while the economists expect the BSP not to implement another reserve requirement ratio reduction in its upcoming meeting, they believe the central bank will do so by the end of the year to address the still tight liquidity conditions in the financial market.

From May to July, the BSP reduced the reserve requirement ratio of large banks in tranches by 200 basis points to 16 percent from 18 percent, which the central bank governor described as really high.