25-point cut in BSP rates seen

The Bangko Sentral ng Pilipinas will likely slash its key interest rates by another 25 basis points in its monetary setting Thursday, given a benign inflation environment that allows it to help boost economic growth, British banking giant HSBC said.

The 25-point cut will bring the BSP’s overnight borrowing rate to 4 percent. This will likely be the last interest rate cut for the year, HSBC economist Trinh Nguyen said in a research note dated February 28.

Monetary authorities have signaled a bias for easing monetary policy further. The BSP last reduced its key interest rates by 25 percentage points in January.

“For now, the inflation outlook is still favorable enough for the BSP to support growth,” Nguyen said, noting that inflation rate this year would likely stay within the government’s target of 3-5 percent even if oil prices remained high.

“While liquidity is ample, the BSP will do what it can to support domestic spending, currently the main driver of growth,” Nguyen said.

The monetary easing is seen being considered as growth outlook remains challenging, with exports likely to slow further and remittances bound to decelerate this year, she said.

Nguyen noted that the outside world was continuing to weigh on the Philippines, citing the rise in domestic oil prices on news of the United States’ and other Western nations’ sanctions on Iran as well as supply issues in Nigeria and Syria.

Nguyen added that news of a second bailout for Greece was quickly overshadowed by weak eurozone economic data, suggesting that demand for Philippine exports and overseas labor would likely slow.

“The rise in global oil prices and weaker growth globally do not bode well for the Philippines’ growth and inflation outlook, as the country depends on exports and remittances for growth as well as imported oil for domestic consumption,” Nguyen said.

Recent indicators already point to a challenging year: exports contracted and remittances decelerated in December 2011, she said.

“With the situation in Europe likely to get worse before it gets better, as well as slower growth in China, Philippine exports look set to face another tough year ahead. Remittances, which have historically been resilient due to the relatively inelastic nature of demand for overseas Filipino workers, will also likely decelerate this year,” Nguyen added.

Fortunately, Nguyen said inflation was expected to remain within target, even with concerns over rising oil prices.