Capital Economics: BSP seen cutting interest rates by 125 bps more to arrest COVID-19 fallout

MANILA, Philippines — London-based Capital Economics expects the Bangko Sentral ng Pilipinas (BSP) to further slash interest rates by an additional 125 basis points (bps) during the first half to arrest the economic fallout coming the COVID-19 pandemic.

After Thursday’s “assertive reduction” of 50 bps from key rates, “it is unlikely to be long before the BSP is forced to ease policy again,” Capital Economics Asia economist Alex Holmes said in a March 19 report titled “Philippines: more easing to come from the BSP.”

“We suspect an emergency rate cut will be needed before its next meeting on May 21. Overall, we are pencilling in 125 bps of additional easing, bringing the policy rate down to 2 percent by the middle of the year,” Holmes said.

“It also looks likely that [the BSP] will use other tools to help the financial sector and businesses that are being hit hard,” Holmes added, citing that the central bank statement last Thursday alluded to “a range of other supplementary measures.”

Holmes noted that “the BSP has not yet introduced loan programs or targeted support for financial institutions and businesses struggling with the disruption from the coronavirus outbreak, as other central banks have, but is likely to do so before long.”

Holmes attributed their expectations of a sharp interest rate cut to Capital Economics’ projection of an also “sharp contraction in economic activity next quarter and for the economy to barely grow at all in 2020 as a whole.”

“The BSP did not publish an updated growth forecast [last Thursday], only saying that economic growth is likely to slow in the near term,” Holmes pointed out.

“The coronavirus outbreak means further loosening is all but certain in the coming months. People living in the island of Luzon in the Philippines (which produces over 70 percent of the country’s gross domestic product) have been ordered to stay home except to shop for essential goods and to travel to work. These measures will probably be extended to the whole country soon and it seems likely they will remain in place in some form for at least the next couple of months. Consumption, the main driver of the economy, is set to slump,” Holmes said.

“What’s more, the drag on the tourism sector is set to worsen. Travel across the world is grinding to a halt as more and more countries advise their citizens against overseas travel and many close their borders to international visitors. Tourist expenditure in the Philippines generates about 2.5 percent of GDP,” Holmes added.

“Meanwhile, the outlook for exports has deteriorated significantly. We are now forecasting a deep global recession, with world GDP set to fall by 1 percent this year, which would be a sharper fall than during the global financial crisis. While the Philippines is less trade-dependent than most in the region, a sharp drop in exports would still weigh heavily on growth. Foreign direct investment (FDI) and remittances are also likely to be hit hard,” according to Holmes.

/MUF