MANILA -- Economists still expect the Monetary Board (MB) to go ahead with additional cuts in the Bangko Sentral ng Pilipinas' (BSP) key policy rates later in the year despite the decision to hold steady during its meeting on Thursday.
ANZ Research, in a report, forecasts 25 basis points slash each when the MB convenes for its regular rate-setting meetings in August and November 2019.
It explained that the MB’s decision to keep policy rates unchanged on Thursday was surprising for several reasons. These include the moderate inflation, the Federal Reserve taking a dovish tone, domestic growth falling below six percent in the first quarter, and the country’s balance of payment (BOP) position.
For one, economic growth, as measured by gross domestic product (GDP), slid to 5.6 percent in the first three months this year due to the impact of the delay in the approval of this year’s national budget because of the budget impasse.
The budget approval delay prevented the government to immediately implement its infrastructure program, among others, and lessened its contribution to domestic expansion.
Monetary officials consider the impact of the delay in the budget approval as temporary but ANZ Research believes otherwise and expects the negative impact to linger until the second quarter of the year.
“Indeed, capital imports and government spending in April remained unremarkable, pointing to sustained weakness in government spending and investment,” it said.
This issue is, however, seen to be countered by the cut in the BSP’s 2019 and 2020 average inflation forecasts to 2.7 percent and three percent, respectively. These were previously at 2.9 percent and 3.1 percent.
The report said monetary officials have indicated openness to additional cuts in the BSP rates since inflation has moderated.
“Although, inflation ticked up temporarily in May and only due to higher vegetable prices, the central bank expects it to fall in the coming months on a high base effect. We concur,” it said.
“We expect the BSP will likely cut rates by 25bps at its next meeting in August and followed by an additional 25bp cut in November,” it added.
Relatively, ING Bank Manila senior economist Nicholas Mapa said monetary officials have again decided to wait for additional data before cutting rates.
“With the Fed in holding pattern overnight, the BSP decided to await further validation on its inflation path, more evidence of the fallout from the global trade war and lastly see how 2Q GDP growth stacks up against 1Q,” he said.
“If inflation shows that it will indeed revert to its downward path and if signs point to still anemic growth despite the initial stimulus from both the monetary and fiscal side, we could see BSP slashing policy rates further in 3Q to help reverse 2018’s aggressive rate hike cycle,” he added.
The MB hiked BSP’s key rates by a total of 175 basis points in 2018 due to elevated inflation, which peaked at 6.7 percent in September and October last year.
Rate of price increases, however, posted an uptick of 3.2 percent last May from month-ago’s three percent, which authorities believe is temporary.
The MB cut BSP’s key rates by 25 basis points last May and some analysts project as much as 100 basis points reduction this year. (PNA)
