Bangko Sentral seen to cut rates in Q3

AMERICAN bank JP Morgan Chase sees the Bangko Sentral ng Pilipinas (BSP) slashing key interest rates by a quarter-percentage-point in the third quarter of this year, preempting any prospective monetary tightening by the US Federal Reserve Board.

In a research note issued late last week—after the BSP kept key interest rates unchanged at its fourth monetary policy-setting for 2015, JP Morgan’s Singapore-based economist for Asia-Pacific Sin Ben Ong said the bank was still expecting a 25-basis point rate cut in the third quarter, ahead of the US Fed “normalization.”

“This assumes that domestic considerations around inflation, sterilization costs will trump concerns over external stability,” Ong said. “This forecast will change if the BSP more explicitly raises concerns about disruptions to markets from the Fed liftoff.”

Global financial markets are expecting the US Fed to raise interest rates by September this year at the earliest, reversing the aggressive monetary stimulus sanctioned after the 2008-2009 US-epicentered financial crisis.

At the local market, the BSP last week maintained its overnight borrowing rate at 4 percent and lending rate at 6 percent. The rate on the special deposit account (SDA), a monetary tool meant to siphon off excess liquidity from the market, was likewise kept at 2.5 percent while the reserve requirement ratio was maintained at 20 percent.

“This was anticipated by most, including us,” Ong said.

Ong noted that the decision to keep rates on hold was made in the context of an inflation environment that continued to be “manageable,” with the central bank still describing inflation expectations as “well anchored.”

Meanwhile, the BSP also trimmed the 2015 and 2016 annual inflation forecasts to 2.1 percent and 2.5 percent, respectively, from 2.3 percent and 2.6 percent. JP Morgan said it expected annual inflation to hit 1.7 percent this year and 2.4 percent in 2016.

“BSP sees CPI (consumer price index) settling within the lower half of the target range and the statement suggested that the central bank sees risks to the inflation outlook as broadly balanced—with upside risks from potential hikes to domestic utility prices but downside risks from an uncertain global commodity price outlook,” the economist said.

The central bank also noted that despite the soft first-quarter economic growth of 5.2 percent, domestic demand conditions remained “firm.”

Ong noted, however, that “while we would generally agree with this view, there is also some risk that the recent export slowdown could also affect non-construction investment. That said, there are mitigating factors, foremost the ample liquidity in the banking system, still-easy credit conditions and easing inflation, which recently breached the lower bound of the central bank’s inflation target range of 2-4 percent year-on-year.”

In its statement, the BSP said its decision to keep interest rates unchanged last week was based on the assessment that current monetary policy settings remained “appropriate” given the within-target inflation forecasts and the underlying strength of domestic demand conditions.