BSP rate cuts totaling 75 bps seen likely in fourth quarter — Nomura

THE Bangko Sentral ng Pilipinas (BSP) will likely reduce rates by a further 75 basis points (bps) cut in the fourth quarter to provide support to the economy, amid constraints on the fiscal side of the economic stimulus program, Nomura Global said.

“We still expect an additional 75 bps in rate cuts in Q4 due to a weak recovery, the risk of a fiscal cliff and inflation well within the target due to the negative output gap persisting,” Nomura Global said in a note issued Monday.

The Monetary Board has three meetings left this year, all falling within the fourth quarter — on Oct. 1, Nov. 19, and Dec. 17.

In its previous policy review on Aug. 20, the Monetary Board decided to keep policy rates steady to allow time for the financial system to fully digest the prior 175 bps worth of rate easing earlier this year to support the economy during the pandemic.

With August inflation at 2.4% and the overnight reverse repurchase currently at a record low of 2.25%, the Philippines has crossed over into negative real interests. Lending and deposit facilities are also at record lows of 2.75% and 1.75%, respectively.

Because the fiscal stimulus is small relative to the size of the economy, Nomura Global said it is pricing in the 75 bps rate cut in the coming quarter.

On Friday, President Rodrigo R. Duterte signed the P165.5-billion Bayanihan II bill which will fund the government’s response to the coronavirus crisis.

“The total size is just 0.9% of GDP and does not meaningfully raise spending on key items such as capital expenditure, which were catalysts of private investment spending in the recent past,” Nomura Global said.

Nomura Global added that the Federal Reserve will continue to keep short-term interest rates on hold as long as inflation does not go beyond 2%. This in turn will likely cause Asian central banks to gauge their policy frameworks as well as assess the possible spillover effects from the Fed’s decisions, it said.

“Central banks are reluctant partly because it is early and they may prefer to monitor the impact of the Fed’s changes from the sidelines. Financial imbalances caused by too-low rates accelerating credit/asset price cycles are also likely on their minds,” Nomura Global said, noting the BSP with its strict inflation targeting role is “unlikely to follow Fed initially.”

In its August policy meeting, the BSP raised its average inflation forecast for 2020 to 2.6% from the 2.3% it issued in June. The 2021 outlook was also increased to 3% from 2.6%. All updated forecasts are still within the 2-4% target set by the central bank. — Luz Wendy T. Noble