An international banking group said it expects Philippine monetary authorities to cut policy rates by at least 25 basis points with inflation expected to fall to three percent in 2009.
Union Bank of Switzerland (UBS) said it originally expected the Bangko Sentral ng Pilipinas to hold off cutting key rates next week but the market has already priced in a 25-point cut.
“Our understanding is that the market consensus is already looking for a 25-point reduction in the policy rate,” said UBS economist Edward Teather.
He said, UBS expected either a 50-point cut, or a 25-point cut augmented by liquidity enhancing measures such as a reduction in Special Deposit Account (SDA) access or reduced reserve requirements.
The Monetary Board of the BSP is scheduled to hold its final policy meeting on Dec. 18 amid reports that prices have softened considerably, although monetary officials were still wary of rising core inflation.
According to Teather, UBS originally expected the BSP to keep its policy settings steady until there are clearer signs that inflation rate and the de-leveraging pressures on the currency had abated.
“Now several factors have come together to change our mind,” he said.
First, Teather said the price data has shown lower food and energy prices meaningfully impacting the inflation figures.
Headline inflation fell to 9.9 percent in November, below consensus and back into psychologically-important single digits. Given recent commodity price declines, he said this data point to further sharp falls in coming months.
“We look for inflation to average three percent in 2009 and 3.8 percent in 2010,” Teather said.
Teather said the November data, combined with the announcement of a higher 2010 inflation target, made it even more likely that inflation expectations for 2009 and 2010 would decline towards their respective inflation targets, spurring the case for lower policy rates.
“Secondly, the data flow on activity has worsened in a way that is hard for policy makers to ignore,” Teather added.
Teather noted that Philippine exports fell 15 percent year-on-year in nominal dollar terms in October - the weakest since 2001 and on par with the softness in Taiwan and South Korea.
“Taiwan and Korean export growth figures for November, meanwhile, suggest this is not a one-off and the weakness is not all export related,” he said. “Evidence of weaker growth should hence also spur rate cuts.”
Moreover, Teather said a rate cut this month will be spurred by the need to respond not just to lower inflation risks but also growth concerns. He said central banks across the region have reduced policy rates.
“Indeed, of the banks that use the interest rate as a policy tool, the BSP is the only central bank not to have cut policy rates in Southeast Asia,” he said.
Finally, Teather said while a weaker peso is a concern for the BSP, the currency had actually gained ground against the dollar in recent trading and had been comparatively stable in trade-weighted terms in the last month.
“This said, another bout of peso weakness is quite possible - we look for P52 on a three month view,” he said. “However, given the moves by other central banks, the BSP may feel the risk of peso weakness has been reduced.”
Teather said these are the reasons why UBS expected monetary easing at the Dec. 18 meeting.