STATEMENTS by Bangko Sentral ng Pilpinas (BSP) Governor Benjamin E. Diokno that another 25 basis point reduction in benchmark interest rates will be considered at the Monetary Board’s sixth policy review for the year on Sept. 26 — Thursday next week — has led private sector economists to expect more moves soon to unravel last year’s tightening.
The BSP has reduced benchmark interest rates by a total of 50 bps so far this year — at its MB’s May 9 and Aug. 8 meetings — slashing rates for overnight reverse repurchase, overnight deposit and overnight lending to 4.25%, 3.75% and 4.75%, respectively.
But that only partially unwinds a 175bp cumulative increase fired off last year in the face of successive multi-year-high headline inflation rates that peaked at a nine-year-high 6.7% in September and October, with the full-year average settling at a decade-high 5.2%.
Inflation has since been on a downtrend, partly after the government liberalized importation of rice — which contributes a tenth to the theoretical basket of goods an average Filipino household consumes, clocking in at a three-year-low 1.7% in August that took the year-to-date pace to three percent, at the midpoint of the BSP’s 2-4% target range for 2019.
“Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno has made it clear that he sees at least another 25bp cut to the policy rate by year-end,” HSBC Global Research economist Noelan Arbis said in a Sept. 19 note, titled: “Philippine Central Bank Watch: On to normalizing rates”, adding that “[t]his is broadly in line with our view.”
“However, he also suggested recently that a rate cut could come ‘before November’, despite the recent rise in global oil prices and cases of African swine fever that could lift food prices domestically,” Mr. Arbis noted.
“This prompts us to move our policy rate cut forecast earlier from 4Q, but our trajectory remains the same. We now expect the BSP to cut its policy rate by 25bp on 26 September and still forecast another 25bp cut in 1Q20, leaving the reverse repo rate at 3.75% by end-2020.”
Also weighing on state economic officials is the need to find the right policy mix to spur economic growth from last semester’s disappointing 5.5% that made it more difficult to hit the government’s 6-7% full-year target for 2019.
Mr. Arbis said “that the BSP is unlikely to reduce rates to ‘accommodative” levels to support growth for now.”
“In our view, leaving the policy rate at around 3.75% provides enough real rate buffer, assuming inflation averages around three percent — midpoint of the BSP’s 2-4% target range — to limit financial stability risks and a build-up in demand-driven inflation,” he explained.
“Meanwhile, it also leaves enough policy space to cut rates further in case of an economic slowdown.”
The central bank chief has also signalled a looming 100 bp cut in banks’ reserve ratio requirement (RRR) that adds to the 200 bp phased cut the was completed at end-July and cuts of the same magnitude last year. While changes in benchmark interest rates can be made only during policy reviews, RRR cuts can take place in any of the BSP’s weekly meetings, Mr. Diokno has said.
“It’s also important to remember that the BSP is engaging in additional easing in the form of RRR cuts, which reduces the need for more aggressive policy rate cuts,” Mr. Arbis said.
“We expect RRR cuts to continue even beyond our outlook for rate cuts in the years ahead. Indeed, the BSP may announce a 100bp RRR cut in 4Q as soon as the 26 September meeting, which may be implemented in a staggered manner.”
Prakash Sakpal, ING’s economist on Asia, in a separate Sept. 20 note said that the “sharp slide in consumer price inflation in August below the central bank’s 2-4% policy target… set another 25bp rate cut in stone…”
“This is one of the two Asian central banks (the other being Bank Indonesia) enjoying significant policy space from 175bp of rate hikes last year,” Mr. Sakpal said.
“We don’t think the BSP will need to use up all that policy leeway unless pent-up government spending fails to revive GDP growth above six percent in the second half of 2019.”
Adding to impetus for another rate cut is the US Federal Reserve’s own second 25 bp cut in Fed funds rate this week which, Michael L. Ricafort of Rizal Commercial Banking Corp.’s Economics & Industry Research Division said in a Sept. 19 e-mail, “sends a strong positive signal about the need to do more cuts in key short-term interest rates as an insurance measure to spur greater economic activities/growth and effectively counter the risks/threats of slower global economic growth/outlook largely due to the lingering US-China trade war”.
“… [T]he latest Fed rate cut effectively reset global monetary policy settings that provide greater flexibility/leeway for other major central banks around the world, including the BSP, to ease their respective monetary policy settings,” Mr. Ricafort said.
“The latest Fed rate cut effectively increases the odds of another 0.25-cut in local policy rates as early as Sept. 16… as primarily justified by the declining trend in inflation and the need to further spur greater economic activities and lead to faster GDP growth…”
He also said that “the slowest growth in universal and commercial bank loans in about 8.5 years and domestic liquidity/M3 growth [that was] among the slowest in seven years would also support further monetary easing by way of a 0.25-cut in local policy rates and/or a cut in the reserve requirement rate of banks as early as September… as any additional peso liquidity infused into the local banking/financial system, as well as lower borrowing/financing rates would increase loans extended by banks for consumers, businesses and other institutions, resulting in faster growth in bank loans, spurring greater economic/business activities and faster… GDP growth”.
Security Bank Corp. Chief Economist Robert Dan R. Roces noted in a separate e-mail that, “[a]s telegraphed by the governor himself, cuts will be meant to pump-prime economic activity for the remainder of the year and for the first quarter of 2020, and we think they’ll be a little less dovish than before given recent geopolitical events”, referring to attacks last Saturday on two Saudi Aramco plants that had cut Saudi Arabia’s oil output by half at 5.7 million barrels a day, slashing a fifth off global production.
Global oil production immediately shot up to hit an intraday peak that was the highest in nearly three decades, before subsequent announcements by Saudi Arabia that it was on track to restoring production eased prices. On Friday, however, Reuters reported that oil prices were on track to jump more than seven percent for the week as a Saudi-led coaling launched an offensive on Yemen’s port city of Hodeidah as the United States worked with Middle East and European allies to build a coalition against Iranian threats after the attack on the Saudi oil processing plants. — with Luz Wendy T. Noble