Bangko Sentral may cut interest rates by another 50 basis points

MANILA, Philippines - The Hong Kong Shanghai Banking Corp. (HSBC) sees the rate easing cycle of the Bangko Sentral ng Pilipinas (BSP) ending soon because of exchange rate volatility and risks to price stability.

HSBC expects monetary authorities to cut rates by another 50 basis points but does not expect any policy easing beyond this point.

The Philippine central bank cut interest rates by 25 basis points last March 5 to 4.75 percent for the overnight borrowing rate and 6.75 percent for the overnight lending rate. Monetary authorities have cut policy rates by 125 basis points in the last three months as part of efforts to stimulate the economy by encouraging banks to lend.

Banks have tightened credit in the wake of the global financial turmoil.

In its report, HSBC said the central bank is nearing the end of its rate easing cycle.

“Amid growing fears over the Philippines’ ability to maintain rapid economic growth, it is tempting to believe that the BSP will continue to cut rates aggressively. However, we believe the central bank is nearing the end of its rate cutting cycle. We stick by our current forecast of another 50 basis points in cuts to 4.25 percent, but currently see no reason to push our target lower still,” HSBC said.

The global banks said that risks to price stability, potential exchange rate volatility, and ample onshore liquidity all suggest that the BSP may go on hold sooner rather than later.

“When it does, we may begin to contemplate eventual rate hikes. But whether they move rates up or down, officials at the BSP are bound to tread softly,” HSBC said.

On the fiscal side, HSBC is sticking to its 2009 budget deficit forecast of P210 billion or 2.7 percent of gross domestic product (GDP).

This is higher than the government’s revised deficit ceiling for 2009 of P177.2 billion from the original program of P102 billion.

HSBC said the government’s spending plans are “ambiguous” given that revenues are likely to come “under pressure.”

“We therefore stick to our budget deficit forecast of about P210 billion (2.7 percent of GDP) for the current year - fiscal slippage indeed, if not quite yet at levels that would cause us to hoist a red flag. In fact the economy requires more infrastructure; it is just that the efforts need to be maintained to avoid a deterioration in revenue effort, especially with the political cycle heading into campaign season later this year,” HSBC said.

The government, for its part, expects the economy, as measured by GDP, to grow anywhere between 3.7 percent to 4.4 percent this year.