Bangko Sentral seen cutting rates soon

The Bangko Sentral ng Pilipinas (BSP) sounded a dovish note with regard to the country’s inflation picture, saying that the pace of price increases of basic goods and services had normalized to within the government’s forecast range.

The pronouncement was interpreted by financial market watchers as a prelude to further monetary easing when the central bank’s policy-making Monetary Board convenes to decide on interest rates early next month. (See related story on page B2-4.)

“The overall headline inflation settled at the midpoint of the target band in the second quarter of 2019,” the BSP said in a statement. “Year-on-year headline inflation fell to 3 percent in the second quarter of 2019 from 3.8 percent in the first quarter.”

This brought the average inflation for the first half of 2019 to 3.4 percent, which is within the national government’s announced target range of 3 percent, plus or minus 1 percentage point for the year.

“Inflation continued to ease during the quarter due to the significant deceleration in food inflation amid sufficient domestic food supply,” the central bank said. “Similarly, core inflation slowed to 3.4 percent in the second quarter of 2019 from 3.9 percent in the previous quarter.”

The central bank added that its survey of inflation expectations of private sector economists as of June 2019 showed lower mean inflation forecasts for 2019 and 2020 relative to the results in March 2019.

“Analysts expect inflation to remain manageable and within the government’s target range, with risks to the inflation outlook likely to be broadly balanced,” the BSP said.

It noted that the key upside risks to inflation are seen to emanate from the adverse effects of weather conditions on domestic food supply, volatile global crude oil prices, higher government spending on infrastructure and the potential impact of African swine fever on local pork prices.

“On the other hand, possible downside risks to inflation are base effects, the continued implementation of nonmonetary policy actions to increase domestic food supply and stabilize prices, and lower global commodity prices owing to weaker demand,” it added.

“Price pressures appear to be under control and given the dovish outlook for the Fed, we expect [BSP] Governor [Benjamin] Diokno to slash borrowing costs further in the third quarter, possibly by an additional 50 basis points, either with a pair of 25-basis point cuts in August and September or a 50-basis point rate reduction in August,” ING Manila senior economist Nicholas Mapa said in an emailed note.

“Meanwhile, we expect the BSP to trim banks’ reserve requirement ratio in a phased manner to close out the year in order to help alleviate
somewhat tight liquidity conditions in financial markets,” he added.