BSP seen either keeping or cutting key rates

The Bangko Sentral ng Pilipinas (BSP) is likely to hold off any monetary tightening and it may even cut interest rates to support growth following the disappointing economic growth rate in the first quarter of the year, British banking giant Standard Chartered said.

In an economic research note dated May 28, Stanchart noted downside risks to its 2015 gross domestic product (GDP) growth forecast of 6 percent for the Philippines after actual growth in the first quarter settled at 5.2 percent year-on-year. Quarter-on-quarter growth was only 0.3 percent, the slowest quarterly growth seen since the first quarter of 2009.

The foreign bank expects inflation rate to slow in the second and third quarter before spiking in the fourth quarter, possibly falling short of the BSP’s full-year target of 2 to 4 percent for some months.

“If inflation continues to slow, the BSP may delay its rate hike or cut rates near-term to support growth, in our view,” the bank said.

While the BSP is neutral for now, Stanchart said it would likely turn “dovish”—or biased for monetary easing—if inflation eased more than expected.

Stanchart expects inflation to slow further in the second and third quarter on base effects which, the bank said, would give the BSP room to cut rates if needed.

In the meantime, the bank noted that net external demand was weak in the first quarter of 2015 after adding to growth for the past three quarters.

“With export growth to China and Japan still looking sluggish, we believe the slow export growth trend is likely to persist, at least through second quarter,” the research said.

The government, however, continues to see a positive trajectory for economic development. It is still optimistic that economic growth and government spending will pick up later this year.

“We expect the BSP to hike rates only after the US Fed (Federal Reserve) hikes rates. However, the surprisingly weak first quarter GDP number has made the Philippine central bank more likely to soften its hawkish stance (compared with other central banks) later this year, if inflation slows more than expected,” the bank said.

A “hawkish” stance refers to bias toward monetary tightening, such as by raising key interest rates, usually to curb inflationary pressures to prevent economic overheating.

The BSP’s next policy rate setting is on June 25.

Commenting on the earlier GDP data release, the BSP said its stance remained “appropriate,” and that government expenditure and 2016 election spending could yet spur economic growth.

“We believe inflationary expectations over the next six months will be critical to our BSP policy rate call,” Stanchart said.

Stanchart also noted that the Philippine economy was now more reliant on demand from Asia than other key regions.

“China and Japan have become more important trade partners for the Philippines than the US and EU,” the bank said.

The research noted that China currently accounted for almost half of Philippine exports, up from only 5 percent in 2000 while US share had fallen by 50 percent to about a fifth of total exports. The EU accounted for only 14 percent.