Lower commercial rates ahead amid banks’ trimmed reserve requirement
Further cuts in banks’ required reserves this coming November and December would ease interest rates on short-term loans between local lenders, London-based Capital Economics said.
“With inflation dropping back sharply and GDP [gross domestic product] growth very weak, the central bank in the Philippines is now on full-on easing mode,” Capital Economics senior Asia economist Gareth Leather said in a repot titled “Taiwan outperforming, [reserve requirement ratio or RRR] cuts in the Philippines.”
Capital Economics noted that besides the cumulative 75-basis point cut in key interest rates so far this year, the BSP by December would have reduced the RRR to 14 percent from 18 percent at the beginning of 2019.
“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 move comes in response to a sharp slowdown in both credit and money supply growth,” Capital Economics said. Interbank rates usually guide the movement of commercial rates offered to consumers, i.e. home and car loans.
For its part, the Washington-based multilateral lender International Monetary Fund (IMF) still sees space for the BSP to slash the key interest rate.
“As you are aware, the BSP has reduced its policy rate by 75 bps since May in response to declining inflation along with slower-than-expected growth in the first half of this year. The BSP has some room to ease monetary policy further over this business cycle should future inflation remain subdued for longer than currently projected,” IMF resident representative in the Philippines Yongzheng Yang said in an e-mail last week.
Headline inflation averaged 2.8 percent at end-September, well within the government’s 2-4 percent target range.
“Having said that, the timing and pace of any further policy easing will depend on how the economy and the global context will evolve in the coming months. We expect the Philippines’ economic growth to start increasing in the second half of the year and in 2020, while inflation should start moving back toward the midpoint of the target range barring any unexpected events,” Yang said.
Economic managers were optimistic of a rebound in GDP growth during the second half as government expenditures on public goods and services picked up to reverse underspending at the start of the year due to late budget approval.
