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HSBC Research forecasts Q3 policy rate cut, Q4 RRR reduction

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BSP
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THE Bangko Sentral ng Pilipinas (BSP) is expected to cut policy rates in August and resort to further reducing banks’ reserve requirement ratio (RRR) in the fourth quarter, according to a forecast made by HSBC Global Research.

According to HSBC Economist Noelan Arbis, the BSP maintained its policy rates during the monetary board meeting Thursday because a previous cut made on May 9 “will take some time before its impact filters through to the real economy.”

“That said, we see scope for further monetary easing ahead, given relatively tepid domestic growth, a less hawkish Fed, and a more benign inflation trajectory in the second half of the year. We forecast a 25 basis point (bp) policy rate cut in 3Q (likely in August) which coincides with the release of the country’s 2Q GDP (gross domestic product) print,” Mr. Arbis said.

The BSP decided to keep its benchmark policy rate at 4.5% as it “believes that the manageable inflation outlook and firm domestic growth prospects support keeping monetary policy settings steady for the time being” according to BSP Governor Benjamin E. Diokno.

On May 9, the MB decided to reduce overnight borrowing and lending and deposit rates by 25 basis points to 4.5%, 5%, and 4% respectively, after a major tightening last year due to rapidly-growing inflation. RRR meanwhile was cut to 16% from 18% this year.

“A prudent pause allows the BSP to observe and assess the impact of prior monetary adjustments including the phased reduction in the reserve requirements to be completed by the end of July,” Mr. Diokno said.




“Overall domestic economic activity is likely to remain firm, supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure spending program,” according to Mr. Diokno.

Mr. Arbis, meanwhile, also said that he expects the reverse repurchase (RRP) rate to be at 3.75% by the end of 2020 with cuts possibly staggered at 50 bp each quarter.

This is “to reduce financial stability and inflation risks,” Mr. Arbis said.

He added that the RRR is expected to be reduced to 15% by the end of this year and to 13% by end-2020.

Nicholas Antonio T. Mapa, senior economist at ING Bank Manila, also said that slashing policy rates is possible in the third quarter if inflation is proven to be in a downtrend and growth remains slow.

“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 the BSP slashing policy rates further in 3Q to help reverse 2018’s aggressive rate hike cycle,” Mr. Mapa said.

“The next policy meeting (Aug. 8) coincides with the release of 2Q GDP growth, which should by all indications be an improvement from the 1Q print with the economy benefiting from the recent round of policy easing (RRP and RRR cuts) with the fiscal support also seen to boost growth momentum after being sidelined for most of the year,” according to Mr. Mapa. — Reicelene Joy N. Ignacio

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