ECONOMIC CONDITIONS are right for a cut in benchmark interest rates, according to analysts asked last week, most of whom said monetary authorities will probably make their move in their sixth policy review for the year this Thursday with a 25 basis-point reduction.
The eight analysts factored in last week’s 25-bp Federal Reserve rate cut, oil price volatility in the wake of attacks on two Saudi Aramco processing plants, as well as slowing inflation and economic growth at home.
A Bloomberg report last Friday quoted Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno as saying: “It’s really inflation that makes a difference in our decision next week…,” adding that monetary authorities “have more space. We want to normalize as soon as possible” from 2018’s cumulative 175 bp hike in the face of successive multi-year-high inflation rates that peaked at a nine-year-high 6.7% in September and October and resulted in a decade-high 5.2% full-year average.
Seven of the eight analysts asked in a BusinessWorld poll last week were of the view that the Monetary Board (MB) will adopt another 25-bp cut — the same magnitude seen in its May 9 and Aug. 8 meetings that slashed rates for overnight reverse repurchase (RRP), overnight deposit and overnight lending to 4.25%, 3.75% and 4.75%, respectively.
Many of the economists asked for the poll also cited Mr. Diokno’s own signals since early last month that a 25-bp cut would be on the table at the MB’s Sept. 26 policy review, and that another reduction in banks reserve requirement ratio — by 100 bp — “is always on the table” at any of the BSP’s weekly meetings towards yearend after the phased 200-bp cut that ended in late-July.
“Domestic inflation and global liquidity conditions are just right to engage in further easing before the cycle turns,” Sun Life Financial Philippines economist Patrick M. Ella said in an e-mail, while Mustafa Arif, economist at ANZ Research, said that “lackluster growth in the first half and a challenging outlook ahead, alongside weak inflation, give the BSP sufficient information to cut.”
Gross domestic product (GDP) growth disappointed at 5.5% last semester as late national budget enactment left new projects unfunded for much of last semester. That compared to a 6-7% the government hopes GDP growth will clock this year. Socioeconomic Planning Secretary Ernesto M. Pernia said it will take an average growth of 6.4% this semester for the economy to hit the lower end of the government’s 2019 target.
“Given Governor Diokno’s recent comments around the timing of the next cut, we expect it next week rather than in Q4…” Mr. Arif said in an e-mail.
Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said: “[l]ocal policy rates could be cut by 0.25 as early as the next rate-setting meeting on Sept. 16… especially if the recent… spike in global oil prices after the drone attacks on Saudi Arabia major oil production facilities turns out to be temporary.”
Reuters reported on Friday that oil prices eased on revived US-China trade war worries, but still posted weekly gains.
“That could help support the view that inflation could still average one-percent levels in the third and fourth quarters…” Mr. Ricafort said, adding that “slower global economic growth… largely due to the lingering US-China trade war and slower Philippine GDP growth… could also support any further easing in local monetary policy…
Another RRR cut, Mr. Rica- fort added, could come “any time soon, as early as within September…” amid “[t]he slowest growth in universal and commercial bank loans in about 8.5 years and… M3 growth among the slowest in seven years would also support further cuts in the RRR…”
Jiaxin Lu, economist at Continuum Economics, said “that another rate cut of 25 bps by the BSP remains on the table” and “it is likely that the reserve requirement ratio may be lowered further at the policy meeting, with a further 100 bps reduction seen…”
For Alex Holmes, Asia economist at Capital Economics, oil price volatility in the wake of the attacks the other week on major Saudi oil processing sites will not “be enough to dissuade the Bank from cutting this month.”
“The most pressing issue now for both the BSP and the US is how quickly Saudi… facilities could resume production,” said Robert Dan R. Roces, chief economist at Security Bank Corp.
But with Saudi Arabia saying that full production will be restored by end-September, “we think there is… a higher chance of a 25 bsp policy cut in the Sept. 26 MB meeting,” Mr. Roces added.
“Even before the Saudi Aramco drone attacks over last weekend, UnionBank’s Economic Research Unit (ERU) expects a 25 bps rate cut from the Monetary Board on their Sept. 26 meeting,” UnionBank of the Philippines, Inc. chief economist Ruben Carlo O. Asuncion said.
“One major reason is seen to be the declining annual increases of headline inflation and the declining nature, as well, of core inflation,” he added, saying that his unit “does not expect any RRR cut in this policy meeting.”
“The RRP cut is more certain than the RRR cut.”
On the other hand, Mitzie Irene P. Conchada, associate dean of the De La Salle University School of Economics, said that “[w]ith stable prices and other economic indicators in the past months, I think the BSP will still retain its key policy rate as well as other rates in its next meeting.”
“We are also watching out for the looming increase in oil prices due to the Saudi Arabia event.” — Luz Wendy T. Noble