ECONOMISTS are expecting at least a 25 basis point cut in the Bangko Sentral ng Pilipinas’ (BSP) key rates on Thursday on the back of slower inflation in July 2019.
The Philippine Statistics Authority (PSA) on Tuesday reported that rate of price increases decelerated anew to 2.4 percent, reminiscent of the July 2017 figure, from last June’s 2.7 percent, thanks to the lower annual rate registered by the heavily-weighted food index.
Average inflation to date is 3.3 percent while inflation rate in July 2018 is higher at 5.7 percent.
Also, core inflation, which excludes volatiles food and oil items registered slower rate of 3.2 percent from month-ago’s 3.3 percent, resulting to an average of 3.6 percent to date.
Standard Chartered Bank Asia economist Chidu Narayanan, in a report, said the slowdown of domestic inflation rate provides the BSP’s policy-making Monetary Board (MB) a leeway to slash the central bank’s key policy rates when it meets on Thursday, August 8.
“Today’s lower inflation, combined with a likely lower Q2 GDP growth of 5.9 percent, may cause BSP to deliver a 25bps rate cut when it meets on Thursday. We expect another 50bps from BSP this year, following the likely 25bps cut later this week,” he said.
The Philippine Statistics Authority (PSA) is scheduled to report the domestic economy’s second quarter performance, as measured by gross domestic product (GPD), on Thursday.
In the first three months this year, the domestic economy posted a slowdown to 5.6 percent from quarter-ago’s 6.3 percent, which economic managers pointed to the impact of the delay in the approval of this year’s national budget.
Authorities said the government was not able to spend as programmed because spending was hampered by the limitations under the re-enacted budget.
Economic managers, however, assured the public that a spending catch-up plan has been put in place to lift government spending and, in turn, help boost domestic growth.
With regards to the inflation rate, Narayanan forecasts this to fall below two percent in August to September and this, he said, is seen to bring average inflation this year to about 2.7 percent.
“A combination of lower food prices, lower oil prices, and a high base effect will help contain inflation,” he said.
The slowdown in inflation rate, which peaked at 6.7 percent in September and October last year, was the driving force behind the 25 basis points reduction the BSP rates last May.
The MB also boosted domestic liquidity through the total of 200 basis points slash in major banks’ reserve requirement ratio (RRR) from May to July this year.
Authorities said a 100 basis points cut in RRR releases about P90 billion into the system.
Despite these cuts, Narayanan said “monetary conditions in the Philippines continue to remain tight.”
He said the bank’s Monetary Conditions Index (MCI) for the Philippines “indicates conditions are still at their tightest in three years on a stronger REER (real effective exchange rate), higher real interest rates and softer credit growth.”
“The likely further drop in inflation below 2 percent is likely to cause conditions to tighten much further,” he added.
Relatively, ING Bank Manila senior economist Nicholas Mapa, in a report, said deceleration of inflation last July increased expectations for a rate cut on Thursday, especially following the cut in the Federal Reserve’s key rates last week.
He cited Philippine monetary officials’ statement that they remain data-dependent vis-à-vis their policy decisions but also noted that BSP Governor Benjamin Diokno has hinted of additional 50 basis rate cut for the remaining months of the year after last May’s reduction.
“We believe we will see at least a 25 bps rate cut (with door open for 50 bps) all the more given that 2Q GDP is likely to settle below the six percent handle,” he added.
ANZ Research, in its report, said effects of elevated inflation rate last year along with weaker demand pressures may result in the decline of inflation below two percent in the next few months.
“Today’s data support the view that inflation remains on a clear downtrend and so we expect the Bangko Sentral ng Pilipinas (BSP) to cut its policy rate by 25bps at its meeting this Thursday,” it added.
Also, UnionBank chief economist Ruben Carlo O. Asuncion, in his report, said the inflation outturn last July is a big factor in the possible cut in the BSP’s key rates this week.
“This, however, will also depend on Q2 output results,” he said, projecting second quarter GDP to be around 5.9 percent. (PNA)
Receive email updates from Business Week.