2 more BSP rate cuts in first half seen

The Bangko Sentral ng Pilipinas (BSP) may have to slash interest rates more aggressively this year to provide more economic cushion against the worsening coronavirus pandemic, an economist from British banking giant Standard Chartered Bank said.

In a March 5 research note written by economist Chidu Narayanan, Stanchart now sees the BSP slashing again interest rates twice this year—by 25 basis points each in March and May.

Stanchart previously projected only one more interest rate cut this year to be done by May. “We see downside risks to our 2020 GDP (gross domestic product) growth forecast of 6.3 percent and are assessing the extent of the downside impact,” the economist said.

The British bank also lowered its 2020 average inflation forecast to 2.9 percent from 3.7 percent on expectation of lower fuel price inflation and reduced domestic consumption.

Stanchart now expects inflation to remain within the BSP’s 2-4 percent target.

“Global monetary easing following the risk of a more widespread coronavirus outbreak than earlier expected, combined with the likely ne­gative hit to Philippines’ growth outlook, is likely to prompt more aggressive monetary policy from BSP,” the research said.

The Stanchart economist added that the lower-than-expected inflation in February was providing space to ease, reducing worries about potential overheating.

“The risks to our call are balanced; the evolution of the outbreak would drive either more or fewer than the two rate cuts we project. BSP has room to ease further, if required,” Narayanan said.

The BSP hiked policy rates by 175 basis points in 2018 to 4.75 percent from 3 percent to combat rising inflation. It has cut rates by just 100 basis points so far, leaving room for a further 75 basis points of easing, the economist said.

The projected reduction in interest rates this March and May by 25 basis points each will bring the BSP’s policy rate to 3.25 percent.

“We earlier estimated a limited impact on Philippines’ headline growth … of the coronavirus outbreak,” the research said. However, it noted that the spread of the outbreak to Western countries had increased the downside risks to growth forecasts.

“US and Europe are key destinations for Philippines’ services exports, with declining activity in either destination likely to weigh on services exports.

In addition, both regions are key sources of remittances, together accounting for over 50 percent of all of the country’s inward remittances and close to 60 percent of remittance growth in 2019,” Narayanan said.

“A slowdown in remittance growth and services exports is likely to hurt domestic consumption, which is a key driver of headline growth. Our growth forecast is currently under review as we assess the extent of the impact of the virus’ spread.” —DORIS DUMLAO ABADILLA