BSP has room to cut interest rates, says Barclays

British financial group Barclays says the Bangko Sentral ng Pilipinas has room to cut its key interest rate by another quarter-percentage point to a new record low of 3.5 percent.

Barclays also expects the Philippines to merit its first investment grade rating in the second half of 2013.

It also remains “constructive” on the medium-term outlook for the country, according to an emerging markets research dated August 30.

The Philippines is currently rated one notch below investment grade by Fitch Ratings and Standard & Poor’s and two notches below investment grade by Moody’s Investors Service. Moody’s, however, has a positive outlook, which means an upgrade is possible in the next 12 to 24 months.

Barclays said its outlook for a further cut in the BSP’s overnight borrowing rate, already at a record low level of 3.75 percent, was “with the global growth environment remaining challenging, BSP’s discomfort with peso strength and fairly contained inflation expectations.”

“Our base case is for BSP to deliver the cut in September, though with the strong GDP [gross domestic product] print and some paring back in Philippine peso strength, the central bank may be tempted to hold its buffer for longer,” the research said.

Barclays also said that 5.9 percent GDP growth posted by the country for the second quarter was stronger than expected. The median consensus forecast based on a Bloomberg poll was only 5.5 percent while Barclays itself had projected only a 5.4-percent growth for the quarter.

The bank said this strong growth was supported by strong demand in consumption, particularly for services and a pick-up in construction spending, largely on the back of higher investment growth.

With the strong 6.1-percent growth for the first half, Barclays said it sees some upside to its 2012 GDP growth forecast of 5.5 percent. But it said it would maintain the forecast for now.

Barclays noted in the research that private consumption remained robust, rising by 5.7 percent year on year compared with a revised 5.1 percent earlier, in turn supported by a 4.8 percent growth in remittances.

“Our sense is that consumption growth will either slow or remain stable at current levels, given increased global concerns and higher risks of a slowdown in export growth,” the research said.

On the other hand, Barclays noted that government consumption remained high, rising 5.9 percent year on year as the government continued to fund capital outlays.

Meanwhile, it noted that growth contribution from net exports had fallen to 2.1 percentage points after adding 7.1 percentage points in the first quarter.