Features Philippines Policy

PREVIEW: Philippine central bank seen cutting rates further amid easing inflation

20, Jun. 2019

By Darlene Basingan

MANILA, NNA – The Philippines’ central bank is likely to cut interest rates for the second consecutive time on Thursday as inflation has eased after spiking last year and economic growth has slowed amid sluggish global demand, economists said.

They also expect further monetary easing in the coming months as slower global growth is keeping crude oil prices from rising sharply despite heightened tension in the Middle East.

Bangko Sentral ng Pilipinas ended its policy tightening cycle at the last meeting on May 9, when it trimmed its key lending rate by 25 basis points to 4.50 percent. It was the first rate cut in nearly three years.

The central bank had raised the benchmark rate by a total of 175 basis points last year to 4.75 percent to tame inflation that had surged to a 10-year high.

Last month, BSP Deputy Governor Diwa Guinigundo hinted at more rate cuts to come, saying the latest action was “not a full normalization,” but he also added that the pace of further easing would be gradual.

Inflation picked up to 3.2 percent in May from 3 percent in April after slowing for six consecutive months as dry weather pushed up food prices, but economists see inflation largely under control.

Michael Ricafort, economist at the Rizal Commercial Banking Corp. (RCBC), sees a possible 25-basis-point cut on Thursday as inflation has remained on a sustained easing trend.

Global oil prices are soft amid a glut, the peso has been stable and consumer prices are likely to show a slower year-on-year rise due to base effects, he said.

The BSP may continue easing in the coming months to support growth amid the U.S.-China trade row, without concern of triggering capital outflows to dollar assets because the U.S. Federal Reserve is widely expected by market participants to cut rates this year, Ricafort said.

Ruben Carlo Asuncion, chief economist at UnionBank of the Philippines, said the Philippine central bank will cut its key rate by 25 basis points on Thursday, noting it may factor in expectations of sliding global oil prices in the longer-term.

“May 2019 inflation is just one data point and this slight uptick may not sway the [monetary board] to stop its easing slant,” he said. “Note that a major driver of inflation in the country is the price of oil in global markets.”

Asuncion said UnionBank economists also see another 25-basis points cut in either the July-September or October-December quarter on anticipated lower global oil prices.

“Slower global growth may also be a major consideration because global growth prospects impact demand for global oil,” he said. “If demand is weak, oil prices tend to be lower as well. This does not even consider the supply in the market.”

Hirofumi Suzuki, economist at Sumitomo Mitsui Banking Corp., also said the central bank may cut its key rate by 25 basis points this week and again at its next meeting on Aug. 8, noting there is room for the BSP to ease further under stable consumer prices.

But HSBC economists expect the central bank to keep its policy rate steady on Thursday while forecasting a 25-basis-point rate cut in the July-September quarter.

“The need to further ease monetary policy is lessened by the fact that the most recent easing measures have not yet been fully implemented,” HSBC said in a report. Credit loosening in Q3 would be justified by the likelihood of a U.S. rate cut this year and more benign domestic inflation expected in the second half of the year, it said.

Economists are divided over whether the central bank will make a further cut in the reserve requirement ratio – the amount of cash lenders must hold as backup – in the coming months.

After leaving the ratio at 18 percent at the May 9 meeting, the bank said last month the reserve ratio would be lowered in three stages to help boost the money available for economic activity: to 17 percent from 18 percent on May 31, then to 16.5 percent on June 28 and 16 percent on July 26.

The RCBC’s Ricafort and HSBC economists expect the BSP to lower the ratio by a further 100 basis points this year.

On the other hand, UnionBank’s Asuncion and Sumitomo Mitsui’s Suzuki said the BSP might stand pat on the reserve requirement for the rest of 2019.