Further BSP rate cut seen

The probability has increased that the Bangko Sentral ng Pilipinas will slash its key interest rates by another 25 basis points to a new record low during the next policy rate-setting in December, an economist from the Bank of the Philippine Islands said.

Given that the sharp deceleration of inflation in October kept another interest rate cut “still very much in the cards,” the peso is also even less likely to appreciate past the 41:$1 level, BPI economist Emilio Neri Jr. said in a recent commentary.

The economist said the surprisingly low October inflation validated the BSP’s assessment that growth, rather than managing inflation, was the more serious concern it needed to prioritize.

“I give it a 65:35 odds in favor of another 25-basis-point cut,” Neri said in an e-mail to the Inquirer.

As monetary authorities have said that the next policy rate-setting on December 13 would be data-driven, Neri said monetary authorities were expected to factor in the third-quarter Philippine gross domestic product growth data on November 28 as well as the November inflation rate report.

Earlier this month, it was reported that the country’s year-on-year inflation rate for October dipped to 3.1 percent from 3.6 percent in September. This marked the lowest monthly inflation since June 2012 and also fell below the 3.5-3.8 percent market consensus forecast for the month.

The October inflation rate brought the 10-month average to 3.2 percent or very near the low-end of the inflation-targeting BSP’s target range of 3 to 5 percent.

Neri said the cumulative 100-basis point interest rate cuts of the BSP were clearly justified. The central bank’s overnight borrowing rate is now at a record low 3.5 percent. “This, therefore, gives the BSP space to carry out additional policy easing should the peso’s nominal appreciation continue to be too rapid and if the overall external outlook remains dim,” Neri said.

But since November inflation rate would be released ahead of the BSP’s policy decision, Neri said there was still a chance that monetary authorities could stay neutral in the December 13 policy meeting. He said the BSP would likely be watchful that 2013 inflation would not tread too far from 4 percent in the first half of 2013.

“In the medium term, the [inflation] print helps the monetary authorities realize that lower policy rates may actually be less inflationary than keeping them high, as its recent easing actions may have actually discouraged aggressive foreign currency-funded credit booms similar to the 1994 to 1996 episode. The latter, of course, was what led to the Philippines’ version of the 1997-’98 Asian financial crisis,” Neri said.

The economist said that monetary authorities today have clearly learned that the high interest rate policy combined with the one-way dollar-to-peso bet that the BSP then adopted as an inflation management policy mix was what had encouraged the more dangerous unhedged foreign borrowings/currency and maturity mismatches that brought the economy to its knees for nearly a decade.