THE Bangko Sentral ng Pilipinas (BSP) is more likely to cut key policy rates in March rather than this month due to stronger fourth quarter economic growth and the uptick in December inflation, HSBC Global Research said.
“We expect the BSP to cut its policy rate by 25 basis points (bps) to 3.75% sometime in 1Q20, but we believe there is a higher likelihood that the cut comes in March and not in February,” HSBC Global said in a report sent to reporters Monday.
A BusinessWorld’s poll last week had 10 out of 13 analysts of the view that the BSP is likely to cut rates at the Feb. 6 Monetary Board meeting amid emerging upside risks to inflation.
BSP Governor Benjamin E. Diokno has said that the central bank is looking to cut rates by around 50 bps in 2020 in order to continue dialling back the 175 bps worth of rate cuts in 2018, when inflation was soaring.
The central bank reduced rates by 75 bps in 2019 to 4% for overnight reverse repurchases and setting overnight deposit and lending rates at 3.5% and 4.5%, respectively.
“Overall, 50bp of rate cuts are still very much in store in the Philippines in our view — it’s only a matter of timing,” HSBC Global economist Noelan Arbis said in a separate report on Feb. 3.
Mr. Diokno said monetary authorities are considering rate cuts as early as the first quarter depending on the conditions and key economic data. The Monetary Board will have two policy meetings in the quarter — on Feb. 6 and March 19.
HSBC Global said an “immediate rate cut” is unlikely needed given the GDP rebound in the fourth quarter and given that the BSP had just cut the reserve requirement ratio (RRR) for banks by 100 bps in December.
“Inflation surprised to the upside in December and January inflation poses some upside risks. Moreover, Q4 GDP growth showed that the economy is back to growing at a fast pace, which suggests limited need for an immediate rate cut,” the report said.
The economy expanded by 6.4% in the fourth quarter, picking up from the 5.6%, 5.5%, and 6% seen in the preceding quarters. Despite this, the 5.9% average growth in 2019 failed to meet the low end of the government target range of 6%.
In 2020 and 2021, the government set a 6.5% to 7.5% target range for growth, hoping that the 2020 budget as well as carryover spending from the delayed 2019 budget will drive the indicator via a boost to infrastructure spending.
December inflation was the highest in six months at 2.5% mainly due to a pickup in food prices. Food price growth eased from 5.1% a year earlier but was up from 1.3% in November.
In January, HSBC Global expects headline inflation to rise by 2.7%, matching the 2.7% consensus in BusinessWorld’s poll last week.
If realized, January will mark the third consecutive month of stronger inflation, although it will be lower than the 4.4% reported in January 2019 and remaining within the 2-4% BSP target for the year.
“We saw higher food prices at the start of the year as a result of higher rice prices globally, partly due to a drought in Thailand, and the Taal Volcano eruption, which disrupted livestock supply in some parts of Luzon,” HSBC Global said.
The Philippine Statistics Authority will report official January inflation data on Wednesday.
HSBC Global also believes that though inflation is likely to rise in the coming months, it will still be well within the BSP’s target range for 2020.
Mr. Arbis said that the RRR reductions have yet to be fully absorbed by the financial markets, which could make the BSP opt to hold rates for now and take a wait-and-see approach.
“It will take time for its impact to be fully felt in the financial system, and we see the most prudent action being to fully assess those impacts before engaging in additional monetary easing at this time,” Mr. Arbis said.
The RRR is currently set at 14% for big banks while thrift and rural banks’ reserve requirements are at 5% and 3%, respectively.
The Monetary Board likewise reduced RRR for nonbank financial institutions with quasi-banking functions to 14%.
Mr. Diokno has reiterated that he will push to bring down RRR for banks to single digits by the end of his term in mid-2023. — Luz Wendy T. Noble
