Think tank sees more rate cuts as inflation slowdown continues

A more aggressive policy easing can take place within the year as inflation and economic growth are expected to remain subdued, said London-based Capital Economics.

The Bangko Sentral ng Pilipinas (BSP) slashed its key rates by 25 basis points on Thursday, citing the continued deceleration in consumer prices.

The rate cut came about after the announcement of a 5.6 percent gross domestic product (GDP) growth in the first quarter of the year, the slowest in four years and well below market expectations.

This was largely attributed to diminished government spending for programs and infrastructure during the quarter, the result of the reenactment of last year’s budget for the first four months of the year.

“Policy easing this year is likely to be more aggressive than we previously thought. We are now expecting two additional cuts before the end of the year,” the think tank said in a research brief yesterday.

BSP cited falling inflation as the main reason for the policy easing, having decelerated further to three percent in April, the slowest in 16 months, on the back of falling prices of food, housing and utilities.

“Inflation is likely to fall back further,” Capital Economics said. “We think oil prices will fall back to around $60 per barrel by year-end. But even if prices remain at their current elevated level of $70 per barrel for the remainder of the year, oil price inflation would still continue to fall back for the rest of 2019.”

It noted that food price inflation will also continue to fall despite the disruption caused by the prevailing El Niño weather phenomenon to production as the newly-enacted Rice Tariffication Law will increase the supply of rice and drive down prices.

Capital Economics sees inflation falling below the BSP’s two to four percent target range this year.

“Overall, we expect inflation to average around 1.5 percent in the third and fourth quarters of this year,” it said.

Its assumption of two more rate cuts for the year is also supported by its forecast that full-year economic output is expected to fall below expectations this year.

“Another reason we expect more cuts is that growth is likely to continue to underwhelm,” it said.

While government spending is expected to accelerate in the succeeding quarters following the enactment of the 2019 national budget in April, the lagged impact of last year’s rate hikes are expected to weigh on economic activity, it added.

Exports are also expected to struggle on the back of slowing global growth.