MANILA, Philippines - British banking giant Hong Kong and Shanghai Banking Corp. (HSBC) believes the Bangko Sentral ng Pilipinas (BSP) would cut interest rates by 25 basis points in the first quarter of the year to boost the economy.
In a report, HSBC economist Trinh Nguyen said that the BSP would likely cut the overnight borrowing rate to 4.25 percent from 4.50 percent and the overnight lending rate to 6.25 percent from 6.50 percent in the first quarter of the year to support domestic demand.
“We expect Philippine monetary officials to work to support domestic demand. Their hands have been tied thus far by high inflationary pressures, but price pressures are now gradually abating,” Nguyen said.
The economist pointed out that inflation would likely eased at 4.3 percent this year from 4.5 percent last year and still fall within the three-percent to five-percent target set by the BSP.
She explained that inflation has been sticky in 2011 due to high commodity prices, short-term supply shocks, and increased transportation costs. Likewise, typhoons Pedring and Quiel that caused short-term food shocks pushed inflation above the BSP’s three-percent to five-percent target.
She pointed out inflation is expected to decelerate meaningfully in the first quarter of the year due to a favorable base effect and the filtering through of monetary tightening measures earlier in 2011.
“We project inflation to stay in the three-to five-percent target in 2012, leaving room for the BSP to cut its policy rate by 25 basis points from 4.50 percent to 4.25 percent in the first quarter, when we expect inflation to trough,” she said.
She added that monetary authorities would likely keep interest rates steady until the end of 2012 due to flush liquidity.
The BSP slashed policy rates by 50 basis points in the first half of last year to keep inflation expectations well anchored amid the rising oil prices. This brought the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.
The BSP also raised the reserve requirement ratio for banks to 21 percent from 19 percent early in the second half of last year to siphon off about P70 billion from the financial system to curb additional inflationary pressures arising from excess liquidity.
According to her, HSBC sees the country’s gross domestic product (GDP) expanding by 3.6 percent this year due to low external demand for Philippine exports.
“Our 2012 GDP growth forecast of 3.6 percent reflects low external demand for Philippine electronics, as well as the country’s growing loss of competitiveness,” Nguyen said.