Timing is everything for Philippines rate cut

MANILA: Facing its deepest contraction in more than three decades, the Philippine economy could do with more interest rate support from the central bank. It’s just not clear if it will come this week.

Economists are split on whether Bangko Sentral ng Pilipinas will deliver more easing, with 12 of 22 economists in a Bloomberg survey predicting the benchmark rate will stay at 2.75%. Nine forecast a 25-basis-point cut and one is projecting a half-point reduction.

The central bank, led by Benjamin Diokno, has done much of the heavy lifting to cushion the virus-hit economy, given limited fiscal support from the government. It still has policy space to ease again, but may wait to see if an economic recovery takes hold as lockdown restrictions are eased.

Bangko Sentral “has been one of more aggressive central banks,” said Noelan Arbis, an economist at HSBC Holdings Plc in Hong Kong, who predicts the key rate will be left unchanged yesterday and reduced as early as the third quarter. “We believe fiscal stimulus is more necessary at the current juncture.”

The central bank has slashed the benchmark rate by 125 basis points this year, reduced lender’s reserve requirement ratio and unleashed a spate of credit and financial-market relief measures. These actions have funneled more than 1.1 trillion pesos (Us$22bil) into the economy.

Angela Hsieh, an economist at Barclays Plc in Singapore, said there was a need for monetary policy to play a bigger role given economic uncertainties.

“We think it could be a close call between a rate cut this week or later,” said Hsieh, who forecasts a quarter-point reduction Thursday.

Here’s what to watch out for in the policy decision:

> Policy space

Whether or not a key rate cut will be delivered, central bank watchers are on the lookout for clues on how low borrowing costs could go.

Inflation is set to remain around the lower end of a 2%-4% target band this year. With Bangko Sentral looking to “maintain positive real rates,” there may be limited scope for more easing, said Nicholas Mapa, a senior economist at ING Groep NV in Manila, who sees yesterday’s 25 basis-point cut as the last in this cycle.

Recent signals from Governor Benjamin Diokno suggest BSP may be inclined to pause for now.

Earlier in June, he said the central bank is happy with the current benchmark rate and will likely conserve its policy tools in case the situation worsens.

Analysts are also watching for any comments regarding the right conditions to resume reducing the reserve requirement ratio.

Diokno recently said there is “too much liquidity” in the financial system.

> Targeted measures

Aside from rate cuts, Bangko Sentral has used targeted measures to boost liquidity and stabilize financial markets - from loosening reserve ratio rules to buying bonds in the secondary market.

Economists will be watching closely for signs that the central bank is able and willing to continue with its targeted steps.

The next scheduled rate decision is on Aug 20. — Bloomberg