Citi sees 25bp BSP rate cut in March
Citi Markets & Securities Services Philippines holds Economic Briefing for 2020. Citi Chief of Research for Pan-Asia Johanna Chua (leftmost) shares Citi’s economic outlook together with Citi economist for the Philippines Nalin Chutchotitham (middle). They were joined by Citi Philippines CEO Aftab Ahmed (2nd from left), Citi Country Treasurer and Head of Markets and Securities Services Paul Favila (right most) and Citi Philippines Head of Corporate Sales for Markets and Securities Services Grace Kim (2nd from right).
The inflation-targeting Bangko Sentral ng Pilipinas (BSP) may slash its overnight borrowing rate by 25 basis points this March, supporting a faster rebound in domestic economic growth this year, an economist from global banking giant Citi said.
In a research note dated Jan. 23, Citi economist for the Philippines Nalin Chutchotitham said it’s possible for the country to grow faster than Citi’s original gross domestic product (GDP) forecast of 6.2 percent this 2020, if the government would be able to fast-track investment spending and economic reforms.
“We continue to expect a rebound of the economy, well supported by the timely full-year 2020 (national) budget passage, expected acceleration of infrastructure investment rollout,” Chutchotitham said.
In 2019, the country’s economic expansion was constrained by the four-month delay in the passage of the national budget.
She said continued employment growth, a potential moderate minimum wage hike, and resilient overseas Filipino remittances and services exports would likewise support household spending this 2020.
To date, the economist noted that several structural reforms on corporate tax, foreign investment, public services and retail trade liberalization were awaiting legislation. Together with accelerated public spending, Chutchotitham said these economic reforms should perk up private investment and employment growth.
“Achieving growth closer to potential, roughly 6.3-6.5 percent, is possible,” she said.
On monetary policy, Citi expects the BSP to ease its overnight policy rates this first quarter. However, she said that the higher-than-expected December inflation print of 2.5 percent, potential increase food inflation due to the recent Taal volcano eruption and the impact of geopolitical uncertainties on near-term global oil prices could lead to a “more cautious” view at the February meeting of the Monetary Board.
“We assign a higher probability to the March meeting for the policy rate cut to 3.75 percent,” she said.
The BSP’s overnight borrowing rate is currently at 4 percent. The policy rate was slashed by a total of 75 basis points last year alongside a 400-basis point cut in the reserve requirement ratio.
“With higher expected fiscal impulse in 2020, we think the BSP need not be too aggressive in its easing,” the economist said.
Citi expects the country’s 2020 inflation to average at 3 percent and 2021 inflation to be 2.9 percent. Being still “fairly benign,” she said this should give the BSP leeway to support a faster economic recovery.
The BSP targets inflation to range between 2 and 4 percent, while the official forecast is an average of 2.9 percent for both this year and next year.
Crop destruction from the volcano eruption was estimated by the National Economic Development Authority to be limited to 0.02 percent of the country’s nominal GDP, the Citi economist noted.
“Meanwhile, the recent strength of the peso suggests there is limited concern of currency depreciation-induced inflation,” the economist said.
The Philippines grew its GDP by 6.4 percent year-on-year in the fourth quarter of 2019, resulting in a full-year average growth of 5.9 percent, the slowest growth seen in eight years.
