BSP has room to cut interest rates, Amro says

NADI, FIJI—The Bangko Sentral ng Pilipinas (BSP) has room to cut interest rates and make borrowings cheaper once more amid slowing inflation and sustained robust economic growth, according to the regional macroeconomic surveillance organization Asean+3 Macroeconomic and Research Office (Amro).

During the launch of Amro’s Asean+3 Regional Economic Outlook (Areo) 2019 report on the sidelines of the Asian Development Bank’s (ADB) 52nd Annual Meeting, its chief economist Hoe Ee Khor noted that when consumer prices in the Philippines and Indonesia were “under pressure” last year, their central banks “took up the rates very sharply, very aggressively.”

“They wanted to be proactive, front-loaded and ahead of the curve,” Khor said.

The BSP hiked key rates by a total of 175 basis points last year as headline inflation hit a 10-year high of 5.2 percent amid new or higher excise taxes slapped on consumption, elevated global oil prices, and domestic food supply bottlenecks.

But Khor said that using the “Taylor Rule”—a widely used tool that assesses where the monetary policy should be—the current policy rate in the Philippines of 3.75 percent was “ahead of where [the rate] should be.”

“For countries like Indonesia and the Philippines, there is monetary policy space. There is space to cut [interest rates] if the condition is right, depending on how the economy goes,” he said.

The Monetary Board, the BSP’s highest policymaking body, will tackle the monetary policy stance when it meets on May 9.

Khor later told reporters that while the Philippines’ policy rate was slightly higher than where it should be based on Amro’s estimates using the Taylor Rule, the BSP’s rate hikes last year were “a good thing—that means it’s very preemptive.”

Khor noted that the BSP seemed to be closely watching the rate of increase in prices of basic commodities such that once the inflation number falls below within the target band, then the central bank will probably be more comfortable easing rates, if necessary.

The inflation rate averaged 3.8 percent in the first quarter, already within the Cabinet-level Development Budget Coordination Committee’s (DBCC) 3-4 percent target.

Amro expects headline inflation in the country to ease to 3 percent this year and next year.

Also, Khor noted that the Philippine economy was “doing quite well.”

Amro expects the Philippines’ gross domestic product (GDP) to grow by 6.4 percent in 2019, faster than the three-year low 6.2-percent economic expansion posted last year, although below the downgraded government target range of 6.5-7.5 percent.

In 2020, Amro sees GDP growth further picking up to 6.6 percent, albeit also below the 7-8 percent target.

Moving forward, Amro said in its Areo 2019 report that “the major risks facing the Philippine economy are mostly short-term ones.”

“Externally, escalating global trade tensions remain the major risk… As global financial conditions have eased, the pressure from short-term capital outflows has dissipated,” it said.

“Domestically, elevated inflation and pockets of financial vulnerabilities are the main concerns… Inflation has come down sharply but uncertainty from global oil prices may delay its return to the midpoint of the target range. Rapid credit growth over the past several years could potentially give rise to financial vulnerabilities. Overall, risks appear to be moderating,” it added. —BEN O. DE VERA