The Bangko Sentral ng Pilipinas (BSP) is expected to cut its policy rates by 100 to 150 basis points within the year, if only to narrow the interest rate differential and to prevent the peso from going up too fast.
According to Standard Chartered Bank economist Nicholas Kwan, a further cut in US policy rates would render the BSP rate cuts irrelevant, especially since the market could already be pricing in these cuts.
“If the US interest rates will be cut by 100 basis points from now, there’s also more room for (the BSP) to cut,” Kwan said. “My guess is 100 to 150 basis points towards the end of the year.”
Inflation rate, according to Kwan, is expected to remain within the BSP target this year, especially since growth is not likely to surge with the same strength as last year.
“We are looking at 4.1-percent growth rate for the gross domestic product, which is well below consensus,” he said. “But honestly, if you look at what we are projecting for the US situation, we may actually be conservative.”
According to Kwan, the Standard Chartered Bank is looking at the US economic woes as similar to the recession that hit it in 2001 and the impact on Philippine growth would be to slow it down to the 4.1- to 4.5-percent range.
“The 4.1- to 4.5- percent range is not very bad,” he pointed out. Of course we came from very strong numbers last year, it may be disappointing, in some sense but in the long run, that’s a sustainable range.”
According to Kwan, inflationary concerns in the Philippines would be short-term, indicating that the BSP had more room to maneuver than economies like Singapore, Hong Kong and China whose inflation rates are at 10- to 15-year highs.
“Inflationary pressures here are mainly coming from the outside – high fuel and food prices. These are things you cannot do much about unless you think the peso to strengthen further,” he said.
Kwan expects the country’s inflation rate to average within the four- to 4.5-percent range and the expected 150-point rate cut to be spread out throughout the year.
“To what extent you can maintain good housekeeping and both in terms of monetary and fiscal policies, that’s important,” he said. “That’s the same for others in the region.”
According to Kwan, the 150-point cut was a “safe estimate” considering that the BSP would have to balance between foreign exchange stability and interest rate differentials.
Moreover, Kwan said that should the US Federal Reserve Board cut its rates even by only 20 points at its March 18 meeting, some countries could no longer afford to not follow through.
The BSP is scheduled to hold its next monetary policy meeting on March 18, right after the US Fed and shortly before the long Lenten break.