Recent BSP policy rate cut deemed too small

The “superficial” 25-basis-point interest rate cut sanctioned by the Bangko Sentral ng Pilipinas last week may spoil the Philippines’ chance of getting an immediate sovereign ratings upgrade and boosting growth this year, economists from Bank of the Philippine Islands said.

In a commentary dated March 1, the bank economists said that despite “numerous compelling reasons for a more aggressive monetary easing,” the central bank had delivered only a “business-as-usual” rate cut that brought back the benchmark overnight borrowing rate to a record low of 4 percent.

“We may be compelled to cut our 5 percent Philippine gross domestic product growth forecast for 2012, following the disappointing decision,” said the research paper written by the BPI financial market group led by economist Emilio Neri Jr. and research officer Monzenn Mallari.

The paper said the BSP had room to cut its key interest rates by 50 basis points during the monetary setting last week, as what investment-graded Indonesia had recently done to support growth in an uncertain global economic environment. The market, in general, had expected 25-basis point cut. The paper, however, said that cutting the rates by only 25 basis points might blow away the Philippine’s chances of getting an early “thumbs-up” from three rating agencies—Moody’s, S&P and Fitch.

“We do not see any of them raising our ratings in the first half of 2012 following this soft rate cut,” it said.

Despite the recent spike in global oil prices, manageable inflation expectations gave the BSP enough room for a much-needed rate cut last week, the research said.

“However, we expected a move of a grander scale, given that Philippine exports remain on a nosedive. The threat of a sharp deceleration in remittances from Europe could drag down this key funding source for local consumer demand,” the research said.

“The BSP-MB (Monetary Board) seems to be treating the current global economic situation like it were business as usual, even as the most recent import figures imply a sustained weakness in exports through the first quarter of 2012,” it said.

As to the market implications of the latest BSP action, the research said this could soften expectations of a rapid peso appreciation versus the US dollar. Even if risk appetite is sustained, the research said this modest rate cut would not allow the peso to appreciate past 42.20 against the US dollar.

Offshore Philippine cash bonds, or ROPs, would still be supported by hopes of a ratings upgrade, but the research said they would be vulnerable to a sudden shift to risk aversion should European Union members encounter refinancing challenges and market uncertainty ahead of elections in Europe in the next 60 days.