25 bps cut in key PH interest rates seen

The Bangko Sentral ng Pilipinas may slash its key interest rates by 25 basis points this Thursday despite some global oil price shocks arising from the recent bombing of Saudi Arabia’s oil fields, economists said.

Even if the Philippines is heavily dependent on Saudi crude—which accounts for 30 percent of the country’s oil imports—PNB economist Jun Trinidad said there were potential “coolants” to oil price spikes and their pass-through effects.

Given the slower economic growth of 5.5 percent in the second quarter and the likely full-year growth of 6 percent, Trinidad noted that domestic demand was moving at a “less than robust pace,” which meant that any oil price spike at this juncture would not be as potent.

Nonetheless, Trinidad’s analysis showed that a $5 per barrel or roughly 10-percent rise in oil prices (assuming a stable exchange rate) would increase local inflation by 0.2 percentage point. He noted that the prevailing import structure indicated a low share of crude or fuel imports at 12 percent versus capital goods and raw material imports.

At the same time, Trinidad noted that global demand was likewise muted by the protracted US-China trade conflict.

“Lackluster status of global demand and domestic demand, rising share of renewable energy, and greater energy efficiency flagged by a higher ratio of real output to US$ imports of fuel/lubricants recently, conspired to lower the relative share of imports of crude, petroleum products and other fuel. This could support a milder pass-through of higher oil prices to retail prices,” he said.

For his part, ING economist Nicholas Mapa said that as the threat of a global slowdown built at a time when domestic growth momentum appeared to be moderating, BSP seemed “primed to unload another salvo of rate reductions to stave off a festering economic slowdown.” As such, he is also betting on a 25-basis point rate cut this Thursday.

“The rate cuts will go a long way to restore now shackled growth momentum as capital formation has turned sluggish under the weight of BSP and its 2018 rate barrage. With household spending recovering, hopefully the resuscitated investment momentum will be enough to offset still sluggish government spending which tries to hurdle last year’s impressive spending spree as government chases 6-percent growth,” Mapa said.