Fitch unit: Bangko Sentral to ease monetary policy further
MANILA, Philippines — The Bangko Sentral ng Pilipinas will likely cut its policy rate by the end of the year following a similar move this month, which came “sooner than expected,” a Fitch unit said.
In a research note sent to reporters Wednesday, Fitch Solutions forecasted a 25-basis point cut in the BSP’s benchmark rate by end-2019 that, if realized, would bring the key rate to 4.25% from the current 4.5%.
For 2020, Fitch Solutions said it sees another 25 bps reduction in the policy rate to 4%.
“We see scope for a further cut as early as September, given the economic and global market backdrop provides some room for further easing,” the Fitch unit said, adding that BSP Governor Benjamin Diokno’s perceived dovish bias added weight to this view.
“We believe some potential inflationary pressures will persist over the coming quarters, and as such forecast just one further cut in 2020... Supply-side inflationary pressures have been building steadily and could ultimately be passed onto consumers as business margins are squeezed,” it added.
“We expect fiscal stimulus to pick-up in the latter quarters of 2019 and into 2020, particularly given President Rodrigo Duterte’s consolidation of power following mid-term elections. Fiscal stimulus could ultimately be enough to boost domestic consumption, and thus inflationary pressures, reducing the need for any further monetary easing,” it continued.
Consumer price growth softened to 3% in April on the back of moderate food inflation. Year-to-date, inflation averaged 3.6%, well within the BSP’s 2%-4% annual target.
In a bid to power growth amid cooling inflation and tight liquidity conditions, the BSP this month cut its benchmark rate by 25 basis points to 4.5% from a decade-high of 4.75%, and announced a three-step reduction in bank reserves to 16% from 18%.
Analysts at Fitch Solutions said the BSP’s decision to end its tightening cycle and ease monetary policy this month came earlier than they had forecast, adding they previously expected the central bank to take a “wait and see” approach amid investor sensitivity to dovish emerging market central banks at a time of “increased growth and market uncertainty.”
Meanwhile, an escalation of the ongoing US-China trade war may prompt a more aggressive easing cycle from the BSP, the Fitch unit said.
“A major downside risk stems from a greater escalation of Sino-American trade tension, resulting in a persistent headwind to growth over the coming quarters. This would likely see the BSP embark on a more aggressive easing cycle into 2020 to help support the economy as external demand wanes,” Fitch Solutions said. — Ian Nicolas Cigaral
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