BSP to resume easing cycle in Q1

MANILA, Philippines — Economists expect the Bangko Sentral ng Pilipinas (BSP) to resume its easing cycle as early as the first quarter of next year as the economy continues to face multiple headwinds   brought about by the still raging coronavirus pandemic.

Kanika Bhatnagar, economist at ANZ Research, said the BSP is likely to slash its key interest rates by another 25 basis points in the first quarter after taking a prudent pause when it kept the benchmark rate at an all-time low of two percent on Dec. 17.

“The economic recovery has a long way to go and therefore, in our view, the rate cut cycle is not yet over, with another 25 basis points cut likely in Q1 2021,” Bhatnagar said.

The BSP has emerged as one of the most aggressive central banks in the world after slashing interest rates by 200 basis points this year, bringing the overnight reverse repurchase rate at an all-time low of two percent to cushion the impact of the   pandemic on the economy.

In all, the COVID-19 response measures of the BSP have unleashed P1.9 trillion into the financial system to boost economic activity.

“Notwithstanding the improvement in domestic sentiment, the Philippine economy continues to face multiple headwinds to growth – weak export growth, slack in labor market, returning overseas workers and muted consumer demand,” Bhatnagar said.

Despite the negative real interest rates with inflation averaging 2.6 percent from January to November versus the record low two percent benchmark rate, Bhatnagar said monetary policy transmission has been ineffective so far as credit growth weakened for both households and businesses.

“The ineffectual policy rate pass-through this year was attributed to the uncertain economic environment which has depressed consumer and business confidence,” Bhatnagar said.

On the other hand, Japanese investment bank Nomura said the BSP would continue to do the heavy lifting, further slashing the benchmark rate by another 50 basis points to an all-time low of 1.50 percent in the first quarter of next year.

“We reiterate our forecast for BSP to cut its policy rate by an additional 50 basis points to a new record low of 1.50 percent, although we are pushing the timing of the cuts out to the first quarter from a 25- basis-point cut in December followed by another one in the first quarter,” Nomura said.

Nomura said the growth recovery of the Philippines would likely disappoint due to its vulnerability to virus outbreak as vaccine procurement plans are delayed due to limited fiscal support.

“BSP’s monetary stance remains clearly dovish, supporting our forecast of further rate cuts early next year,” Nomura said.

BSP Governor Benjamin Diokno earlier said the central bank is likely to keep a low interest rate environment until the end of 2022 to help the country fully recover from the impact of the   pandemic.

“We made a policy decision that we will keep the rates at this level until the economy has fully recovered to the previous level of maybe 6.5 to 7.5 percent and unemployment is down to the five percent range. So we plan to keep this low interest rate for long, maybe toward the end of 2022,” Diokno said.