BSP seen further cutting key policy rates this year

Further cuts in the central bank’s policy rates can be expected within this year following last week’s reduction by 25 basis points, according to DBS Group.

The financial services provider said in a research note that it did not expect monetary authorities to bring down the overnight borrowing rate to 3.75 percent so soon.

DBS had given the heads up on a possible rate cut this year, noting that the Bangko Sentral ng Pilipinas “had been more dovish in recent weeks.”

On July 26, the BSP announced that it had also cut the overnight lending rate to 5.75 percent based on its assessment that “price pressures have been receding, with risks to the inflation outlook slightly skewed to the downside.”

This means that the BSP expects full-year inflation to settle at the lower end of the target range of 3 percent to 5 percent.

The BSP is seen taking full advantage of the benign inflation in the first half of the year to cut rates, DBS said. According to the National Statistics Office, the rate of consumer price increases hit 2.8 percent year on year in June and averaged 3 percent in the first semester.

DBS also noted that the BSP revised its inflation projection for 2013 down to 3.2 percent from 3.4 percent previously.

The Singapore-based group added that the low interest rate regime should render local assets less attractive to foreign investors.

“This is in line with the BSP’s strategy to reduce speculative inflows and limit peso strength,” DBS said. “Over the past two weeks, the BSP has also taken steps to restrict foreign funds from tapping its special deposit account (SDA) and also lowered the interest rates on the SDAs.