Bangko Sentral seen to cut rates in March
The Bangko Sentral ng Pilipinas may be compelled to slash its key interest rates by as much as 50 basis points to a new record low during its next monetary-setting meeting in March given the country’s “alarmingly weak” export trend, a Bank of the Philippine Islands research said.
The Philippines may follow Indonesia’s bold lead in monetary easing especially given the benign inflation conditions in the country, said a commentary issued on Friday by BPI’s financial markets group led by economist Emilio Neri Jr.
The research said that such a more aggressive monetary easing was warranted by the BSP’s anticipation that headline inflation could fall to levels below 3.5 percent as early as February, as suggested by the monetary institution’s full-year forecast of 3.1 percent for 2012.
“Add this to the fact that SDAs [special deposit accounts] are becoming more expensive to service every passing minute, and that the peso is appreciating too fast, and the BSP may conclude that a cut of 25 basis points may no longer be enough to cushion the Philippines from persistent external weakness,” the research said.
On the other hand, the DBS Group sees the BSP cutting the overnight rate again in March only by another 25 basis points to 4 percent and then stay neutral for the rest of the year.
“We think that monetary easing may not be done just yet,” DBS said in a research, adding that an inflation downtrend amid stable food and commodity prices would give the BSP “more confidence in maintaining its easing bias on monetary policy.”
The DBS group expects Philippine inflation to average at around 4 percent for the full year.
For its part, BPI issued the outlook on a 50-basis-point interest rate cut on Friday immediately following reports that the country’s merchandise exports had fallen 20.2 percent year on year in December 2011, marking an eighth straight month of decline and the weakest performance in Southeast Asia so far.
“We will no longer be surprised, therefore, if the BSP carries out a preemptive policy rate cut of 50 basis points in their March 1 policy meeting to bring the Philippine policy rate (referring to the overnight borrowing rate) to a new record low of 3.75 percent,” the research said.
“If the Bank of Indonesia found it necessary to carry out aggressive policy easing to cushion a slowdown in exports and keep growth above 6 percent, the BSP can clearly entertain the idea of cutting rates to a new low,” it added.
The research opined that the sluggish gross domestic product growth in 2011 as well as a negative momentum in export growth should be enough reasons for the BSP to take its cue from its Indonesian counterpart.
“The weak exports report will most likely lead to a downward revision of the already-disappointing 2011 GDP growth of 3.7 percent,” the paper said, adding that the 2.9-percent negative contribution of net exports to GDP growth would be even lower when the revised figures come out in May.
With emerging markets unable to cushion the impact of the weak demand from G3—referring to the United States, Europe and Japan—the BPI research said further aggressive monetary policy has become more compelling.
It noted that the Philippines had the weakest exports performance in Southeast Asia for 2011. Total merchandise exports for the year amounted to $48 billion, 6.8-percent smaller than the level the year before. This was likewise noted as a sharp reversal of the 34-percent growth in merchandise exports in 2010.
