Economist eyes steady BSP policy rate

MANILA -- An economist of ING Bank N.V. Manila forecasts the Bangko Sentral ng Pilipinas (BSP) to keep key rates steady this week, but will resume its easing moves starting the first quarter of 2020 if 2019 domestic growth falls below target.

In a report Friday, ING Bank N.V. Manila senior economist Nicholas Mapa said after cutting rates by a total of 75 basis points since the start of this year, the central bank’s policymaking Monetary Board (MB) is widely expected to hold rates steady during its seventh rate setting meet for the year on Thursday.

“The self-professed ‘pro-growth’ Governor (Benjamin Diokno) moved swiftly to unwind BSP’s previous rate hike cycle, cutting policy rates by a cumulative 75 bps year to date, but recently indicated that the current monetary stance is ‘appropriate’,” he said.

Last year, the MB increased key policy rates by a total of 175 basis points to help address inflationary expectations as rate of price rose on account of supply side factors due to rising rice prices.

After peaking at 6.7 percent in September and October 2018, inflation has decelerated to 0.8 per

cent last October, bringing the 10-month average to 2.6 percent, within the government’s 2 to 4 percent target until 2021. This development, along with the assessment that domestic growth remains firm despite a slowdown in the first half of the year from 6.2 percent in the last quarter of 2018 to 5.6 percent and 5.5 percent in the first and second quarter this year, respectively, made Philippine monetary officials slash the central bank’s key policy rates by 25 basis points each last May, August, and September. The MB also reduced as much as 400 basis points the banks’ reserve requirement ratio (RRR) in a bid to boost domestic liquidity and encourage banks to lend more to help hasten domestic spending and domestic growth. In the third quarter this year, growth -- as measured by gross domestic product (GDP) -- expanded by 6.2 percent, higher than year-ago’s 6 percent. To date, GDP growth averaged at 5.8 percent, below the government’s 6 to 7 percent target for the year. “The recent 3Q GDP print bested market consensus and limits pressure on Diokno to deliver an immediate policy reduction but given his pro-growth leaning, we expect him to factor in 4Q 2019 GDP (release in January 2020) in his policy direction next year,” Mapa said. He forecasts monetary officials to hold any RRR decision and just monitor the impact of the series of RRR cuts, the last of which will take effect by the first week of December this year, since the “successive rounds of liquidity infusion have had only a marginal impact on bank lending thus far as freed up funds have simply driven the local bond rally further.” Mapa thus discounted any BSP rate easing decisions until the end of this year and to resume only by the first quarter of next year “should full year 2019 GDP come in right at the lower-end of the government target of 6 percent.” “Meanwhile, we expect Diokno to continue his directive to lower the RR in a phased and well-telegraphed manner with up to 200 bps worth of reduction carried out evenly throughout the course of 2020,” he added.