BSP seen cutting policy rate in Q1

The inflation-targeting Bangko Sentral ng Pilipinas (BSP) may cut its overnight borrowing rate by 25 basis points in the first quarter of this year alongside further reductions in the reserve requirement on banks in the coming quarters, an economist from Security Bank said.

In a research note on Thursday, Security Bank’s Robert Dan Roces said the country’s inflation rate would likely remain within the target range this year except for some bump in the first months due to the eruption of Taal Volcano.

Many fear that the volcanic ashfall that affected nearby communities could exert pressure on inflation due to the impact on livestock produced by Calabarzon (Cavite, Laguna, Batangas, Rizal, Quezon), the region most affected by the natural disaster. The BSP is targeting inflation to stay within the range of 2-4 percent. The inflation scare in 2018 prompted Congress to pass the rice tariffication law last year. The liberalized importation of rice eased pressure on food prices and allow inflation to go back to targeted levels last year.Given the outlook on a benign inflation rate, Roces said that aside from easing the overnight policy rates, the BSP might also reduce further the bank reserve requirement over the next couple of quarters. He is projecting a cut of least 200 basis points for 2020.

In 2019, the BSP slashed the reserve requirement by a total of 400 basis points and the overnight rates by a total of 75 basis points.

On economic output, Roces sees the country’s fourth quarter 2019 gross domestic product (GDP) growing by 6.6 percent.

“Capital formation meltdown was what really hurt us in the past quarters, plus delayed spending due to a delayed budget. With inflation returning to the 2-4 percent central bank target range in December and the reserve requirement cuts lending increased liquidity, capital formation looks better for the quarter,” Roces said.

Furthermore, Roces said economic growth could be lifted by household consumption that was higher especially during the holiday seasons. “Government spending was also better for that quarter, and we expect GDP to average 6 percent for 2019,

or the lower end of the growth target for the year,” he said.