Another 50 bps rate cut seen amid low inflation

MANILA, Philippines — DBS Bank Ltd of Singapore expects the Bangko Sentral ng Pilipinas (BSP) to slash interest rates by another 50 basis points this year as inflation is seen hitting bottom next month due to base effects.

Maysita Crystallin, economist for the Philippines and Indonesia at DBS, said inflation may remain stable for the rest of the year.

“BSP has cut policy rate by 50 basis points this year and is likely to cut by up to 50 bps further this year as inflation remains stable and growth prospect continue to dim,” she said.

The BSP has slashed interest rates by 50 basis points so far this year due to inflation downtrend and the slower than expected gross domestic product (GDP) growth in the first half of the year.

Inflation averaged 3.3 percent in the first seven months after easing to a 31-month low of 2.4 percent in July from 2.7 percent in June, while GDP growth slowed to a four-year low of 5.5 percent in the second quarter from 5.6 percent in the first quarter due primarily to the delayed passage of the 2019 national budget.

Crystallin said inflation may ease further to 2.2 percent in August due to slower demand and stable oil and food prices as well as cheaper power rates.

She said inflation would bottom in October after peaking at 6.7 percent in September and October last year.

“Peso depreciation as well as monetary policy easing could offset the easing inflation but with longer time lag as domestic demand remain soft. We see inflation to soften further until around October partly due to the high base effect from last year,” she said.

The next rate-setting meeting of the BSP is scheduled on Sept. 26.

“But given slower demand, inflation is likely to stay close to two percent for the rest of the year,” the economist said.

The central bank lifted interest rates by 175 bps as part of a tightening cycle to keep inflation from spiraling out of control.

Inflation accelerated to 5.2 percent last year from 2.7 percent in 2017 and exceeded the BSP’s two percent to four percent target due to elevated oil and food prices as well as weak peso.