No more BSP rate cuts this year - US think-tank

MANILA, Philippines - New York-based think-tank Global Source Partners believes that the Bangko Sentral ng Pilipinas (BSP) would no longer cut interest rates further this year after a cumulative 50-basis point reduction in January and March.

In a report, Finance undersecretary Romeo Bernardo and economist Margarita Gonzales said soaring oil prices in the world market as well as the strong liquidity in the domestic market would constraint monetary authorities from further cutting interest rates within the year.

“Apart from worries about oil, concerns about liquidity will likely constrain monetary authorities from making additional cuts in the policy rate this year,” Bernardo and Gonzales stated in the 17-page report.

The report stated that inflation surprised on the downside, dropping to 2.7 percent in March from 2.9 percent in February or within the low end of the BSP forecast range of 2.7 percent to 3.6 percent.

While oil and transport costs jumped month-on-month as expected, Bernardo and Gonzales said a sharp fall in food and non-alcoholic beverage prices had been able to more than offset the month-on-month jump in oil and transport costs.

They added that inflation would likely remain on a relative benign path despite the fact that oil prices still pose a strong threat moving forward.

“Due to base effects, the headline rate should continue to trend down until the summer months, when food prices may also be expected to remain low,” the report.

The think-tank decided to keep its inflation forecast of 3.6 percent this year which is well within the three percent to five percent target set by the BSP.

Inflation kicked up to 4.8 percent in 2011 from 3.8 percent in 2010 due to a run-up in fuel and food costs early last year before stabilizing in later months as well as the impact of tropical storm on food prices and higher price of imported rice due to the flood in Thailand.

The BSP slashed interest rates by 25 basis points last January 19 and by another 25 basis points last March 1 due to benign outlook for inflation coupled by expectations of a global slowdown.

This brought the overnight borrowing rate back to the record low of four percent and the overnight lending rate to six percent.

The rate cuts were done to help boost economic activity and support market confidence as 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 and underspending by the Aquino administration.

The think tank sees the country’s GDP expanding by 4.5 percent this year.