BSP rate cuts seen in 2nd half

London-based Capital Economics sees a total of 50-basis point (bp) reduction in key interest rates in the second half amid steady but above-target inflation and the Bangko Sentral ng Pilipinas’ (BSP) “openness” to further rate easing.

“We are more dovish on the policy outlook in the Philippines,” Capital Economics Asia economist Alex Holmes said in a report on Friday. He said they expected two 25-bp cuts in the next six months to bring the policy rate to a new low of 1.5 percent.

“We also expect a 100-bp cut in the RRR,” Holmes said, referring to banks’ reserve requirement ratio.

“May inflation data show that the headline rate held steady at 4.5 percent for the third month in a row, despite rising fuel prices. This is likely to further calm worries about price pressures at the BSP, after the bank cut its 2021 inflation forecast to 3.9 percent. With the recent spike in food prices likely to unwind further and base effects from last year’s slump set to slip out of the annual comparison, we expect headline inflation to fall close to the bottom of the BSP’s 2 to 4 percent target by the fourth quarter,” Holmes said.

Also, Holmes pointed to BSP Governor Benjamin Diokno’s recent pronouncement that he was “open to doing more” monetary easing, while acknowledging that the banks’ current mandatory reserves level was “still high” at 12 percent.

The BSP’s Monetary Board will next discuss the monetary policy stance on June 24.

In a separate report also on Friday, senior Asia economist Miguel Chanco of UK-based Pantheon Macroeconomics said the month-on-month food deflation posted in May “[indicated] that the government’s more recent supply-side interventions are working, for now.”

“Accordingly, food inflation slipped further to a six-month low of 4.6 percent. This probably will be the low, as base effects look set to keep food inflation sticky until the fourth quarter,” Chanco said.

“We maintain that headline inflation still has another leg up, despite its recent stability, as the recovery in global oil prices will continue to feed through to transport and utility costs,” he said, adding that remaining pressure on inflation would likely stem from the housing and utilities component.

“All told, we have revised our inflation forecasts down slightly, and now see it peaking at 5.8 percent in September,” Chanco added. —Ben O. de Vera