Interest rate cut seen by mid ’19

Amid slowing inflation, London-based Capital Economics expects an interest rate cut by the Bangko Sentral ng Pilipinas (BSP) by the middle of next year.

“Inflation looks to have peaked. Headline inflation fell to 6 percent in November, from 6.7 percent in October—the first fall in the headline rate since December last year. With inflation on a downward trend, the central bank’s decision to pause its recent tightening cycle at its December meeting came as no surprise,” Capital Economics said in a Dec. 18 report.

“With inflation likely to drop further over the coming months, we think the BSP will start to loosen monetary policy around the middle of 2019,” it added.

Amid elevated inflation, the BSP had jacked up its key policy rate by 175 basis points to 4.75 percent in recent months before the policymaking Monetary Board decided last week to keep the rate unchanged.

The government recently reported the easing of the headline inflation as food supply issues were addressed.

Last week, Capital Economics noted that policymakers were “sounding increasingly dovish on the outlook for inflation.”

“With inflation set to drop back sharply over the coming months and growth likely to remain subdued, we think the first cut will come sooner rather than later. We now expect the first rate cut to be in the middle of next year, and for the central bank to cut rates by 50 bps by end-2019,” it said.

“We had previously thought the BSP would wait until early 2020 before cutting rates. In contrast, the consensus according to FocusEconomics is still expecting 50 bp worth of rate hikes by the end of next year. Financial markets are pricing in one further 25-bp rate hike over the next three months,” it added.