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Philippines: BSP has room to cut rates — Moody’s
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has enough policy space to totally unwind a tightening cycle that saw interest rates jump by 175 basis points in 2018, according to Moody’s Investors Service.
Christian de Guzman, senior vice president at Moody’s, told The STAR the Bangko Sentral ng Pilipinas (BSP) has room to further slash interest rates given the benign inflation environment.
“Given benign inflation, there appears to be room to continue to normalize policy rates to levels seen prior to the inflationary spike in 2018,” De Guzman said.
The Monetary Board raised interest rates by 175 basis points amid a tightening cycle in 2018 as inflation climbed to 5.2 percent from 2.9 percent in 2017, exceeding the central bank target of two to four percent, due to higher oil and rice prices as well as the weak peso.
However, inflation eased to 2.5 percent in 2019 amid cheaper oil and rice prices as well as the strong recovery of the local currency against the dollar.
The central bank has slashed interest rates by 100 basis points since May last year. It also slashed the reserve requirement ratio for big and mid-sized banks by 400 basis points and for small banks by 200 basis points, freeing up P450 billion into the financial system to boost economic activity.
Based on its latest assessment, the central bank sees inflation averaging three percent for 2020 and 2021.
BSP Governor Benjamin Diokno already signaled a 50-basis points rate reduction this year, of which 25 basis points was delivered last Feb. 6 to support market confidence and to provide additional policy support to ward off the potential spillovers associated with increased external headwinds including the global outbreak of the novel coronavirus disease (COVID-19).
Last Thursday, Diokno said the central bank is not ruling out additional interest rate cuts if things deteriorate much beyond what was originally forecasted.
BSP estimates showed the COVID-19 outbreak could slash the country’s gross domestic product (GDP) growth by 0.2 percentage points in the first quarter and by another 0.4 percentage points in the second quarter, bringing the full-year drag to 0.3 percentage points.
“As you know, I committed to 50 basis points this year. We’re down by 25 basis points, so we still have
25 basis points. I’m not totally ruling out an additional cut more than 25 basis points this year. Definitely there will be another 25. I’m not ruling out 50 or 75,” Diokno told reporters last Thursday.
Lower interest rates translates to lower borrowing costs for companies and individuals, helping boost lending as well as economic activity.
For his part, De Guzman said Moody’s slashed the economic growth projection for the Philippines to 6.1 percent this year as the COVID-19 outbreak adds to other pressures on growth in Asia Pacific, primarily through trade and tourism, and for some sectors also through supply-chain disruptions.
“The reduction in the Philippine forecast reflects our view of spillovers from slower growth in the rest of the region, primarily the large impact of the COVID-19 outbreak in China,” de Guzman told The STAR.
Nevertheless, the debt watcher said the forecast has been maintained at a relatively high level as much of the economic impact is expected to be limited to the first quarter.
De Guzman said normalization of activity would resume later in the second quarter.
Source: https://www.philstar.com/business/2020/03/02/1997330/bsp-has-room-cut-rates-moodys