Another rate cut still on the table — analysts

By Luz Wendy T. Noble, Reporter

THE surprise policy rate reduction from the central bank may not be the last, as it takes an aggressive and accommodative stance while waiting for the fiscal stimulus measures to catch up, according to analysts.

Nomura Global Markets Research analysts Euben Paracuelles and Rangga Cipta said in a report on Friday the continued manageable inflation environment will afford the Bangko Sentral ng Pilipinas (BSP) with more space for further easing in the near term.

“We maintain our forecast that BSP will cut its policy rate by 25 bp (basis points) in Q3 to 2%, although we acknowledge a rising risk that it could still deliver more. We think the inflation outlook will become more supportive of further easing in the near term,” the Nomura analysts said.

On Thursday, the central bank slashed its benchmark interest rate by a bigger-than-expected 50 basis points. This brought down the overnight reverse repurchase, lending and deposit rates to new record lows of 2.25%, 2.75%, and 1.75%, respectively.

BSP Governor Benjamin E. Diokno said the Monetary Board considered the deteriorating global economy, the extent of the health crisis, and the “protracted” and “uneven” recovery track in their “accommodative stance.”

“There remains a critical need for continuing measures to bolster economic activity and support financial conditions, especially the effective implementation of interventions to protect human health, boost agricultural productivity and build infrastructure,” Mr. Diokno said on June 25.

He said the benign inflation environment allowed them to cut rates again to support the economy and lift market confidence.

“The policy statement, in our view, was clear in citing that because the inflation outlook continues to be benign, the monetary stance can be more accommodative amid BSP’s rising concerns about the deteriorating growth outlook as a result of the COVID-19 (coronavirus disease 2019) pandemic,” Nomura said.

The BSP on Thursday has also revised its inflation outlook for 2020 and 2021 to 2.3% and 2.6%, from 2.2% and 2.5%, respectively. Both estimates are nearer the lower end of the 2-4% target set by the central bank.

“The main factor that led to the revision of the forecast is the increase in global oil prices, but this was partly offset by the weaker economic growth both domestically and globally, as well as the continued stability of the peso,” BSP Deputy Governor Francisco G. Dakila, Jr. said on June 25.

In May, headline inflation settled at 2.1%, slower than the 2.2% in April and the 3.2% a year earlier. With this, average inflation from January to May stood at 2.5%.

LAST CUT?
On the other hand, Fitch Solutions Country Risk and Industry Research sees the rate cut as the last for a while as the BSP is likely to deploy other monetary policy tools to provide further support for the battered economy.

“We expect the BSP to maintain its key policy rate and a dovish bias over the coming quarters, leaning on other monetary tools and macroprudential measures to ensure credit conditions remain favorable,” Fitch Solutions said.

Aside from rate easing worth 175 bps so far this year, the central bank unveiled regulatory relief measures to help affected sectors. These include an allowance for alternative reserve compliance in the form of lending to micro-, small-, and medium-sized enterprises (MSMEs) as well as large enterprises, and the reduction of credit risk weight for loans disbursed to MSMEs.

Fitch Solutions said the BSP may, however, look to bring down rates further “if their expected increase in fiscal stimulus fails to materialize.”

It warned the country may suffer a deeper slump if containment measures will be renewed in the second half of the year.

“As such, monetary stimulus may need to take even more unconventional steps to support MSMEs and lower income households,” it said.

Meanwhile, Nomura is pricing in a reduction in the reserve requirement ratio (RRR) of lenders in the latter part of the year.

In April, RRR of big banks was reduced by 200 bps to 12%, while reserve requirements for thrift and rural lenders were kept at four percent and three percent, respectively. The Monetary Board has authorized Mr. Diokno to cut RRR by a total of 400 bps this year.

“[W]e push out the timing of our call that BSP will cut the RRR by 200bp to 10% to later in the year, particularly when some of BSP’s earlier emergency measures start to expire and may lead to an unintended tightening in liquidity,” Nomura said.

Prior to the outbreak, Mr. Diokno vowed to bring down RRR to a single digit by the end of his term in mid-2023 to be in line with regional neighbors.

Amid the crisis, Mr. Diokno has said the country’s liquidity position has improved.

Domestic liquidity or M3, which is seen as the broadest measure of money supply in an economy, rose by 16.2% to P13.6 trillion in April, faster than the 13.3% pace in March. On the other hand, bank lending grew by 12.7%, slower than the 13.6% in March.