BSP may cut rates by another 25 bps - Barclays

MANILA, Philippines - Downside risks to global growth and the peso’s appreciation could prompt the Bangko Sentral ng Pilipinas (BSP) to trim policy rates by another 25 basis points (bps) within the year, Barclays Capital Research said in a report.

“Our base case is for global growth to improve in the second half of 2012; however the risks are biased to the downside. Given this backdrop and the desire to limit (peso) appreciation, we believe the BSP could cut rates by 25 bps later in the year,” Barclays said in its Emerging Markets Research.

“Our view is that further policy action will be a function of global growth – the correlation of Philippines GDP (gross domestic product) to global growth is nearly 70 percent – because inflation will remain broadly manageable and domestic spending resilient,” the report explained.

The BSP’s policy-making Monetary Board cut last Thursday its key rates by 25 bps to new record-lows of 3.75 percent for overnight borrowing and 5.75 percent for overnight lending, citing a tamed inflation and the need to support growth amid a gloomier global economic outlook.

This was the third rate cut for the year, following similar moves on January and March before rates were kept unchanged during the meetings on April and May. The Monetary Board will meet again to set policy rates on Sept. 14.

Barclays said the BSP’s decision to cut rates came as a surprise for most analysts who forecasted rates will be retained amid a stable inflation that averaged three percent as of the first half of the year and a stronger-than-expected 6.4-percent growth in the first quarter.

A “dovish” statement from BSP Governor Amando Tetangco Jr. two days before the policy rate meeting however signaled the cut, Barclays said, with the central bank chief saying there was scope in monetary policy to make sure inflation will not fall below its three- to five-percent target for the year.

“However, our sense is that the recent outperformance of the (Philippine peso) relative to regional peers was likely an important factor as well,” the report said.

“We believe that by cutting the policy rate, the central bank is reducing interest rate differentials to try to temper the pace of (Philippine peso) appreciation,” it added.

Large capital flows have allowed the peso to appreciate by roughly five percent this year. While a strong currency gives more purchasing power to consumers and causes imports to be more affordable, it also makes Philippine export products abroad cheaper as well as trims the value of remittances from overseas Filipinos.

Sought for comment, Tetangco said BSP will remain committed to its mandate of price stability.

“Capital flows as we have always maintained add a layer of complication to monetary policy. We have tools other than policy rates to deal with these,” he said in a text message.