BSP seen to cut rates twice in 1H

The Bangko Sentral ng Pilipinas (BSP) is expected to bring down key overnight rates – at least twice – in the first six months of this year after raising it by a cumulative 175 basis points in May to November in 2018.

ING Bank senior economist, Nicholas Mapa, said: “With the stars aligning for decelerating inflation, a more dovish Fed (US Federal Reserve) and possibly slowing growth momentum, the chances for a BSP two-pronged easing in the first half (of 2019) has increased significantly.”

Mapa said that they are looking to lower previous inflation forecasts due to the latest price trends and the lower December inflation turnout of 5.1 percent, the slowest in seven months. “With our inflation forecasts likely to be lowered given recent price trends, we will be revisiting our forecast for BSP policy in 2019 as well.” The full-year 2018 inflation average of 5.2 percent was spot on with the BSP’s projection.

In the latest ING market commentary following the government’s December inflation announcement, it said cost-push inflation is “seen to dissipate further in coming months.”

Mapa said price pressures eased further in December with the CPI-heavy food items forcing the headline number below six percent for the first time since July. “(The) December 2018 prices posted a 5.1 percent gain from the same month in 2017, falling slightly below market consensus for a 5.6 percent gain,” he noted. “Meanwhile, core inflation reversed to post a slower growth print of 4.7 percent compared to the previous month’s 5.1 percent, allaying fears of deeply-rooted inflation pressures.”

Also, inflation deceleration will be assured with rice tarrification. “With more imported grains currently on delivery over the next few weeks, the rice tarrification bill set for signing and energy prices depressed, risks to the inflation outlook appear tilted to the downside and expectations now more anchored,” said Mapa. “In light of these developments we will be revising lower our inflation outlook for both 2019 and 2020.”

Mapa further noted that with BSP becoming more confident that inflation will fall to within the two-four percent target this year and in 2020, the “case for the BSP to reverse its stance as early as the second quarter (2019) has gained considerably.”

Aside from monetary policy easing, the market is also anticipating reduction in banks’ reserve requirement ratio (RR).

“On top of BSP’s widely-anticipated 200bps cut to RR scheduled for the year, the BSP will likely slash borrowing costs as early as the May 9 meeting to help bolster slowing growth momentum with its price stability mandate safeguarded,” according to Mapa. Last year, the BSP cut RR ratio by 200bps and the additional liquidity was reabsorbed back through its auction-based market operations.

“With market anticipating a less aggressive Fed rate hike cycle in 2019, the BSP may be afforded a window to walk back its own aggressive rate hike salvo from 2018,” he added.

The Monetary Board has raised key rates 5x this year to curb high inflation which hit a peak of 6.7 percent in September and October.

However with easing price pressures, the BSP on its last Monetary Board policy meeting last December 13 has decided to leave benchmark overnight rate untouched to allow previous monetary responses “to work their way through the economy.”

The BSP cut its 2019 and 2020 inflation forecasts to 3.18 percent and 3.04 percent, respectively, both lower than previous forecast of 3.5 percent and 3.3 percent.