Standard Chartered sees 100bp rate cut this year

THERE IS ROOM for the central bank to cut interest rates by as much as 100 basis points (bp) this year, an analyst at a global bank said, noting that inflation could slow to below two percent in the third quarter.

Standard Chartered Bank economist Chidu Narayanan said a 25bp cut can be expected by May, to be followed by 50bp in June and 25bp in August.

“We expect inflation to fall further to below two percent in Q3 due to a high base and the fading of one-off boosts from tax reforms and poor weather. Lower inflation is likely to further tighten already-tight monetary conditions,” the bank analyst said on Friday.

“We now expect Bangko Sentral ng Pilipinas (BSP) to respond with policy rate cuts starting in May 2019, partially reversing last year’s hikes.”

This will undo the series of tightening moves which the BSP unleashed last year totalling 175bp, which were done in five successive hikes to rein in then rising inflation expectations.

Inflation has continued its fall for the fourth straight month, with the February rate clocking in at 3.8% to mark the first time in a year that inflation fell back into the central bank’s 2-4% target range. The two-month pace is still at 4.1%, although market players expect inflation to keep slowing this year.

“We previously expected BSP to remain on hold, though we had flagged rate-cut risks given tightening monetary conditions and a sharper-than-expected drop in inflation,” Mr. Narayanan added.

Newly installed BSP Governor Benjamin E. Diokno said on Friday last week that there is “room for monetary policy easing if the present situation continues,” even as he noted that timing remains the main issue.

He added that the Monetary Board (MB) and will remain “data-dependent and evidencebased” in its policy moves.

Standard Chartered also sees an even softer full-year inflation, having scaled down its forecast to 2.7% from 3.5% previously.

Its latest projection is substantially slower than the BSP’s 3.1% forecast for full-year average inflation as of last month’s policy meeting.

However, the global bank noted that higher world crude oil prices and possible weather disruptions later this year could push prices up.

Mr. Narayanan also expects the reserve requirement ratio to be slashed by 200bp this year, mirroring the reductions done last year. At present, big banks need to set aside 18% of their deposits as reserves, a level that is among the highest globally and keeps the cost of borrowing high. Mr. Diokno had said that he wants to “expedite” further cuts in banks’ required reserves.

The Monetary Board will hold a rate-setting meeting on March 21, its second policy review for the year but the first to be presided over by Mr. Diokno. —