Think tank sees up to 50 bps rate cuts next year

After keeping interest unchanged last week, the Bangko Sentral ng Pilipinas (BSP) can be expected to resume cutting policy rates next year by around 50 basis points (bps) to support the economy, said London-based Capital Economics.

“The upshot is that the BSP is likely to resume its easing cycle next year. We have pencilled in 50 bps of further cuts, taking the policy rate to 3.5 percent. The consensus is for just one more cut in 2020,” the think tank said in a new report.

In stopping the policy easing, the central bank last week said the prevailing monetary settings remained appropriate.

The overnight reverse repurchase rate was maintained at four percent, while the interest rates on the overnight deposit and lending facilities were likewise unchanged at 3.5 percent and 4.50 percent, respectively.

This was supported by the benign inflation outlook as well as firm expectations of domestic economic growth.

BSP noted that a “prudent pause in monetary adjustments” would enable the cumulative reduction in policy rates and cut in reserve requirement ratios to work their way through the economy.

The BSP has reduced interest rates by 75 bps so far this year, partially unwinding the tightening cycle that saw benchmark rates rise by 175 bps last year.

Capital Economics said BSP would likely resume the easing cycle next year to provide support to the economy.

It noted that despite the presence of tailwinds, growth would “disappoint” because of the weak external environment.

“Gross domestic product growth jumped from 5.5 percent year-on-year in the second quarter to 6.2 percent in the

third quarter and there will be a couple of tailwinds to the economy in the quarters ahead. Investment growth is set to continue its recovery, supported by looser monetary policy and a recovery in government spending on infrastructure. Consumption growth should remain strong, as low inflation boosts real spending power,” said Capital Economics.

“However, these factors are likely to be offset by the tough external environment. Export growth is set to remain lackluster as global growth continues to slow,” it said.

The firm expects the economy to expand by around six percent next year.

“Although this would make the Philippines one of the region’s fastest-growing economies, it would still be well short of the government’s 6.5 percent up to 7.5 percent target and slower than the economy has achieved in recent years,” said Capital Economics.