BSP seen to cut rates further

The Bangko Sentral ng Pilipinas is expected to further cut interest rates on top of an additional reduction in bank reserves amid easing inflation and slowing growth.

The three-phased cut in the reserve requirement ratio (RRR) of universal and commercial banks approved by the BSP’s Monetary Board last week “should provide a boost to economic growth and suggests that further cuts to the policy rate are likely soon,” Capital Economics senior Asia economist Gareth Leather and Asia economist Alex Holmes said in a May 17 report titled “Philippines loosens further, Pakistan back to the IMF.”


The RRR reduction to 16 percent from 18 percent at present will be implemented in three stages—an initial 100-basis point cut on May 31, followed by 50 bps each on June 28 and July 26.

For London-based Capital Economics, the move was in response to a sharp slowdown in both credit and money supply growth.

“The RRR cut should put downward pressure on interbank rates, which have been trading at the top of the BSP’s interest rate corridor since around the start of the year. The central bank has estimated that the cut to the RRR should release around P190 billion of extra liquidity into the banking system, which we estimate will boost credit growth by up to three percentage points,” it said.

Capital Economics noted that the RRR cut was decided a week after the Monetary Board cut the policy rate by 25 bps to 4.5 percent, hence “[suggesting] the central bank is now in full-on easing mode.”

“Looking ahead, as long as inflation continues to fall back as we expect, further monetary loosening is likely,” Capital Economics said.

As such, Capital Economics expects the BSP to further cut key interest rates by 50 bps more besides another 200 bps in RRR reduction within the year.

HSBC also expects another 100-basis point reduction in the RRR in the fourth quarter to bring the ratio to 15 percent by yearend. Furthermore, it expects another quarter-percentage point cut in the key policy rate, bringing the overnight borrowing rate down to 4.25 percent by the end of 2019.

Euben Paracuelles, economist at Japanese investment house Nomura, also said that the BSP would cut its overnight rates by a total of 50 basis points this year.

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