Easing to resume as cash flow slows–economists

Slower cash supply growth and the reversion of inflation back to its tamer trajectory will give the Bangko Sentral ng Pilipinas (BSP) confidence to resume its monetary policy easing measures early next year.

Despite already being on its record lows, the central bank’s main interest rate could see further cuts, particularly at 25 basis points in the first three months of 2021, according to economists at the First Metro Investments Corp. (FMIC) and University of Asia and the Pacific (UA&P).

“Money growth continues to decelerate and this, together with inflation going back closer to 2 percent by January 2021, provides the BSP with more elbow room to cut policy rates by another 25 basis points in the first quarter of 2021 to provide a further boost to the domestic economy and lower borrowing costs of the national government,” FMIC and UA&P analysts said in their most recent assessment of the local economy through their publication.

Latest data from the BSP showed that domestic liquidity—broadly measured as “M3”— grew slower at 12.3 percent to P13.5 trillion in September. This is tamer than the 13.7 percent growth seen in the previous month.

Bank lending—which is one of the primary drivers of domestic liquidity—grew at 2.8 percent in September, also weaker than the 4.7 percent growth in August.

Inf lation, meanwhile, hit a 19-month high in November at 3.3 percent. This uptick, however, is caused by the severe typhoons that ravaged the country in recent months and is expected to wane off back to normal in the coming months.

“We think November’s uptick will turn out as a one-off event and prices will revert to pre-typhoon days. Thus, we keep our annual forecast of 2.6 percent for the year,” analysts said in the Market Call.

Annually, the BSP holds eight meetings every six weeks. For 2020, five of these meetings were rate cuts to bolster monetary policy support for the pandemic-ravaged economy.

In total, the central bank has already cut its rates by 200 basis points - 25 basis points in February, 50 basis points in March, another 50 basis points in an off-schedule monetary board meeting in April, another 50 basis point cut in June and the latest 25 basis point cut just last month.