Monetary authorities will likely reduce interest rates — possibly as early as February — in an effort to ensure that the Philippine economy returns to its high growth path following disappointing gross domestic product (GDP) numbers in 2019.
In a statement, the local unit of Dutch financial giant ING Bank explained that weaker capital formation was the main culprit in the pause in the country’s uninterrupted string of annual economic growth above 6 percent which has come to an end in the seventh year.
“With growth momentum apparently still sluggish, the need for additional stimulus from both the fiscal and monetary authorities is now even more apparent,” ING Manila senior economist Nicholas Mapa said.
“We continue to price in a rate cut by the [Bangko Sentral ng Pilipinas] in February, followed up by further easing in May to help rekindle the now scuttled new Philippine growth story,” he added.
The central bank’s policy making Monetary Board will have its first meeting to decide on the direction of interest rates this year on Feb.6. Lowering its key overnight borrowing rate of 4 percent will help encourage borrowers to take out loans which, in turn, may spur greater economic activity.
The dovish BSP Gov. Benjamin Diokno had earlier said authorities were ready to ease interest rates further if supported by data such as the latest growth numbers released on Thursday by the government.
Mapa noted that, in 2018, BSP rattled off a barrage of rate hikes to combat a then menacing inflation.
“The 175-basis point rate hike salvo did its job of anchoring inflation expectations but may have had unintended consequence of sapping fading investment momentum,” he said.
With government spending held back by the budget delay and private investment halted by the lagged effects of previous rate hikes, BSP attempted to quickly dial back the previous action by cutting 75 basis in 2019.
The reversal helped salvage capital formation in the fourth quarter of 2019 but the time delay for monetary action will take some time to be felt by the economy, Mapa said.