Think tank: Aggressive rate cuts coming, starting with PH in August
AS INFLATION COOLS

Think tank: Aggressive rate cuts coming, starting with PH in August

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) would likely start easing monetary policy settings in August as high borrowing costs begin to weigh on economic growth while inflation is expected to remain within target, Capital Economics said.

The London-based think tank’s projection matched the rate outlook of Governor Eli Remolona Jr., who had said the BSP might even cut ahead of the US Federal Reserve as he acknowledged that liquidity conditions were tighter than necessary for taming inflation.

The Monetary Board, the policymaking body of the BSP, will meet again on June 27 to decide on the rates.

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“Central banks have recently started to sound more dovish, and we expect most to begin easing policy this year, starting with the Philippines in August,” Capital Economics said in a report.

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“In most places, rate cuts will come sooner and be more aggressive than financial markets are currently pricing in,” it added.

Latest government data showed inflation quickened to 3.9 percent in May from 3.8 percent in the previous month on the back of higher utility costs.

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READ: May inflation rises to 3.9%, highest in five months

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While the latest reading almost breached the central bank’s 2 percent to 4 percent target range, last month’s price gains were not as bad as many analysts had expected and still fell within the BSP’s forecast range of 3.7 percent to 4.5 percent. This is after food inflation slipped to 5.8 percent in May from 6 percent previously, limiting the headline rate’s climb.

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Boosting economic growth

For that reason, Remolona had said the BSP might cut its policy rate—currently at a 17-year high of 6.5 percent—ahead of the Fed, which he said could possibly ease in July.

Remolona previously said the BSP might reduce borrowing costs by 25 basis points (bps) in August at the earliest. This, after data showed the economy grew 5.7 percent in the first quarter, slower than the Marcos administration’s 6 percent to 7 percent target as high borrowing costs crimped both consumer and government spending.

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READ: PH GDP growth likely to miss gov’t targets for 2024, 2025

Moving forward, Capital Economics said state expenditures would unlikely make a significant contribution to growth in the next quarters as the Marcos administration aimed to reduce its budget deficit. This, in turn, would give the BSP more reason to slash rates soon to boost growth.

“With growth set to slow and inflation likely to remain within target, interest rate cuts are likely to come onto the agenda soon. The pace and timing of rate cuts are likely to be in part determined on when the Fed starts to loosen policy,” Capital Economics said.

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“Given our view that the Fed will start cutting interest rates in June, we think the BSP will follow shortly after. We have 175 bps of cuts penciled in for this year, which is more dovish than other analysts are expecting,” it added.

TAGS: economy, Inflation

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