Barclays Capital sees BSP cutting rates by another 25 bps

MANILA, Philippines - London-based Barclays Capital Ltd believes monetary authorities would again slash key interest rates by another 25 basis points in the second quarter of the year.

Barclays economist Prakriti Sofat said in a research note that another 25-basis point cut is expected between April and June after the Bangko Sentral ng Pilipinas (BSP) lowered its policy rates by 25 basis points last Jan. 19.

“We continue to expect another 25 basis point cut from the central bank in the second quarter,” Sofat stressed.

The central bank lowered interest rates by 25 basis points last Jan. 19, bringing the overnight borrowing rate to 4.25 percent and the overnight lending rate to 6.25 percent.

She pointed out that BSP Governor Amando Tetangco Jr. already announced that the Philippines would likely face external headwinds this year.

The country’s gross domestic product (GDP) growth slowed to 3.7 percent last year from 7.6 percent in 2010 due to weak global trade as well as the underspending by the Aquino administration.

The figure was lower than the revised GDP growth target of 4.5 percent to 5.5 percent for 2011.

“We turned increasingly cautious on 2012 GDP in early December, cutting our growth forecast 60 basis points, to 4.2 percent, given the larger drag from net exports and softer private investment,” she added.

The economist believes that spending by the Aquino government would pick up this year to boost the country’s economy.

“However, we believe government capex disbursals will accelerate this year given the systems put in place,” she said.

The Cabinet-level Development Budget Coordination Committee (DBCC) sees the country’s GDP expanding between five percent and six percent instead of the original seven percent to eight percent target this year.

On the other hand, the investment bank sees inflation averaging 3.5 percent this year from 4.4 percent last year as Brent crude oil price is expected to average $115 per barrel.

“Inflation expectations are also broadly anchored throughout the economy,” she said.

The BSP has set its inflation target between three percent and five percent between 2011 and 2013. Based on its inflation forecast, inflation is likely to average 3.1 percent this year and 3.4 percent next year.

Barclays Capital sees the peso strengthening further to 42 to $1 over the next 12 months.

“In the near term, we believe the Philippine peso will largely be driven by global risk sentiment, with BSP likely willing to accept movements broadly in line with the region to support exports and the purchasing power of remittances,” Sofat added.