The Bangko Sentral ng Pilipinas (BSP) could slash the policy rate to 2 percent this year as the Philippines struggles to contain the COVID-19 disease and its economic fallout, London-based Capital Economics said.
“Given the deterioration in the growth outlook, it is unlikely the [BSP] would have waited until its next meeting on May 21 to lower rates again,” the think tank said.
“The central bank has now cut interest rates by a cumulative 125 basis points (bps) since the start of the year, bringing the policy rate to a record low of 2.75 percent,” Capital Economics Asia economist Alex Holmes said in an April 16 report.
Holmes was referring to Thursday’s surprise and hefty 50-bps cut in key interest rates.
Philippine economic officials had downgraded their growth expectations for this year to flat or a maximum 1 percent contraction.
Capital Economics forecast Philippine gross domestic product (GDP) to shrink by 4 percent in 2020 amid the pandemic.
“Given the dreadful outlook for the economy, the BSP is likely to cut further,” Holmes said.
Holmes said he believed the BSP would lower policy rate by another 50 bps at the next meeting of its policy-making body Monetary Board on May 21.
He said he expects a further 300 bps cut in banks’ reserve requirement ratio, or the amount of cash banks have to keep intact.
But BSP Governor Benjamin E. Diokno on Friday said the Monetary Board cancelled the scheduled May 21 meeting because there have been “appropriate” rate cuts already.
Holmes noted that “rate cuts will help the economy by lowering interest payments for indebted companies and households.”
“But with firms reluctant to invest and consumers either unwilling or unable to spend, rate cuts will not be as effective as normal,” he said.
He said GDP could be 15 to 20 percent lower if lockdowns that restricted people’s movement were kept in place.
“Data on the movement of people from Google suggest that the measures in the Philippines are having a dramatic impact on economic activity,” said Holmes.
“Even if the lockdowns are not extended again, they will only be lifted gradually,” he said.
“As such, consumption, the main driver of the economy, is likely to remain depressed for at least the next few months,” he added.
In the meantime, he said, “the external environment has continued to worsen.”
“We now expect the global economy to contract by 4 percent this year, which would weigh heavily on demand for exports and dampen important remittance flows,” Holmes said.
Shilan Shah, Capital Economics senior economist, said in a separate April 16 report that “a drop in remittances would increase the risk of a protracted period of economic weakness for the Philippines, Cambodia and much of South Asia.”
“Without support from remittances, Vietnam would be running a current account deficit, while the existing shortfalls in the Philippines, Cambodia and all of South Asia would be significantly larger,” Shah said.
“A drop in remittances would add to economic woes already facing the Philippines, Bangladesh and Pakistan where measures to contain the spread of coronavirus have created severe economic hardship for the poorest,” Shah added.
In 2019, Filipinos living or working abroad sent back home a record $33.5 billion in personal—cash and in kind—remittances.
Remittances were the Philippines’ biggest source of foreign exchange income, which insulates the domestic economy from external shocks by ensuring steady supply of dollars into the financial system.
Also, these cash transfers were a major consumption driver, therefore contributing to economic growth.