Stanchart sees another 75-point cut in policy rates for the year

The Bangko Sentral ng Pilipinas (BSP) may slash key interest rates by 75 basis points more for the rest of the year, which is seen to contribute to stronger economic growth in the second semester, British banking giant Standard Chartered Bank said.

In a research note issued on Friday, Stanchart economist for Asia Chidu Narayanan said the Philippine economy could grow by 6.1 percent for the full year as a better second semester would offset the weak first semester.

“Support for second half growth is likely to come from further monetary policy easing and a pickup in government infrastructure investment following the first quarter budget impasse,” Narayanan said.

Stanchart expects inflation to fall below 2 percent in the second half, giving the BSP room to cut policy rates further, after the initial reduction in May.

The additional 75-basis point rate cut projected by Stanchart will take total rate cuts this year to 100 basis points as BSP responds to lower inflation and softening growth.

“This would partly reverse the 175 bps of hikes it delivered last year. The consensus has started to converge with our call for rate cuts. BSP Governor Benjamin Diokno has said growth will be prioritized. We think this increases the risk of further rate cuts if growth disappoints, although this would be dependent on stable market conditions,” the research said.

Stanchart’s proprietary monetary conditions indices suggested that conditions in the Philippines were the tightest in three years. While moderately lower interest rates and a weaker currency have helped to loosen conditions since March, they are still tighter than in 2016 to 2018.

“A further drop in inflation is likely to cause conditions to tighten much further. Credit growth to households and corporates fell to 14.6 percent and 11.5 percent year-on-year, respectively, in May 2019,” the economist said.

“Policy rate cuts, along with the reserve requirement cuts, should support credit growth for the rest of 2019. We expect the central bank to ease policy rates to reduce rising real interest rates.”

On the reserve requirement, Stanchart expects another 200-bp reduction in 2020, but noted that persistent liquidity tightness and still-soft growth could bring part of these forward by the fourth quarter of this year.

The BSP earlier sanctioned 200 bps in reserve requirement rate cuts effective May, June and July this year.

Meanwhile, the economist said Philippine trade deficit was likely to persist in 2019, although this could narrow from 2018.

On the peso, Stanchart forecasts the peso to end this year at 52 against the US dollar, and depreciating to 53:$1 by the middle of next year.

“Slower capital-goods imports and strong portfolio inflows have been the primary drivers of the Philippine peso’s recent strength. We expect some of these tailwinds to fade, with the peso weakening modestly in second half as a result. However, high real rates, a relatively stable BOP (balance of payments) and low inflation are still supportive of the PHP and should keep any weakness modest,” the economist said.