BSP rate cut seen despite higher oil prices

Even as global oil prices are expected to further rise, central banks across Asia—including the Bangko Sentral ng Pilipinas (BSP)—are still seen to cut interest rates this year, according to London-based Capital Economics.

“The price of Brent crude has risen by about 40 percent since the start of the year, from $53 to $75 per barrel, mainly due to supply disruptions. Reflecting this, our commodities team have revised their end-year forecast for Brent crude from $50 to $60 per barrel,” Capital Economics senior Asia economist Gareth Leather said in an April 26 report titled “Higher oil prices, Korean investment slump.”

“Our new forecast implies that inflation across the region will be a bit higher this year than we had previously anticipated. Nevertheless, our forecasts are still consistent with energy price inflation falling back over the coming months and rebounding only very gradually next year,” Capital Economics said.

Despite this, it said central bankers were unlikely to be too concerned by the recent rise in oil prices, noting that although headline inflation has ticked up a bit recently, it remains comfortably within the target range of most central banks while core inflation across the region also remained subdued.

“In fact, with economic growth slowing, we think central banks will switch into easing mode soon. The Philippines is likely to cut rates in May, and we also think the central banks of Malaysia, Korea and Singapore will loosen policy by yearend,” it said.

The BSP’s policymaking Monetary Board will tackle the monetary policy stance during its meeting on May 9.

Last month, the Monetary Board kept key interest rates steady even as it jacked up the policy rate by a total of 175 basis points to 4.75 percent in 2018 due to faster-than-expected inflation.

The rate of increase in prices of basic commodities reached a 10-year high of 5.2 percent last year partly due to skyrocketing global oil prices during the third quarter.

The inflation rate averaged 3.8 percent in the first quarter, within the Cabinet-level Development Budget Coordination Committee’s 3-4 percent target.

However, Capital Economics earlier said the looming prolonged dry spell due to El Niño and the recent uptick in global oil prices posed small risks to consumer prices in the near term.

Capital Economics had projected inflation to fall below the bottom of the central bank’s 2-4 percent target range by the second half of the year and average 2.5 percent this year, 3 percent in 2020, and 3.5 percent in 2021.

As such, it expects the BSP to cut the policy rate to 4.25 percent this year, 4 percent in 2020 and 3.75 percent in 2021.