Nomura: Easing cycle over; BSP seen keeping rates

MANILA, Philippines — The easing cycle by the Bangko Sentral ng Pilipinas (BSP) is over and monetary authorities are likely to keep interest rates untouched next year, according to Nomura Securities Ltd. of Japan.

In a report, Nomura economist Euben Paracuelles said the BSP may keep benchmark rates at four percent next year due to rising inflation.

“We therefore maintain our view that BSP’s cutting cycle of the policy rate is over and that the policy rate will be left unchanged at four percent through 2020,” he said.

The BSP has slashed interest rates by 75 basis points this year due to the benign inflation environment and slower-than-expected gross domestic product (GDP) growth, partially reversing a tightening cycle that saw benchmark rates jump by 175 basis points last year.

It also lowered the reserve requirement ratio for big and mid-sized banks by 400 basis points and by 200 basis points for small banks to free up more funds into the financial system to boost economic activity.

This paved the way for a prudent pause as the BSP decided to keep interest rates unchanged last Nov. 14 to allow previous monetary actions to work its way into the economy.

BSP Governor Benjamin Diokno had said authorities would monitor potential risks after inflation accelerated to a three-month high of 1.3 percent in November from a 43-month low of 0.8 percent in October, ending five months of straight easing.

“This latest statement, in our view, is more circumspect than before and therefore does not signal further easing in the near term. On the data front, as argued above, we think the combination of the unemployment rate hitting a record low and inflation bottoming out and rising further towards the mid-point of its two to four percent target next year suggests further policy rate cuts are no longer warranted, in our view,” Paracuelles said.

The economist said inflation would further rise to above two percent in December amid demand-side pressures as well as fading high base effects.

“That said, we now estimate full-year 2019 inflation will average 2.5 percent, a touch lower than our earlier forecast of 2.6 percent. For 2020, we maintain our forecast for CPI inflation to average 3.1 percent, slightly above BSP’s latest forecast of 2.9 percent but still within BSP’s two to four percent inflation target, pointing to stable policy settings rather than more policy rate cuts ahead,” he said.