By Bianca Cuaresma, May 7 2019; Business Mirror

Image Credit to Business World

SOFTENING inflation and cooling growth may push the Bangko Sentral ng Pilipinas (BSP) to cut its main policy rate in its upcoming meeting this month, according to an economist.

Chidu Narayanan, Standard Chartered economist for Asia, said he expects a 25-basis-point (bps) cut in the BSP’s overnight reverse repurchase (RRP) rate in its meeting on May 9.

“The BSP is scheduled to meet on May 9, following April inflation data on May 7 and first-quarter GDP earlier in the day. We expect the BSP to start its rate cut cycle with a moderate 25-bps rate cut, driven by declining inflation and softening growth,” Narayanan said.

The economist forecasts inflation to fall below 3 percent and GDP growth in the first quarter to hit 6 percent. The projected rate of GDP expansion is slower than the 6.3 percent recorded in the fourth quarter of 2018.

For 2019, Narayanan said economic growth could reach 6.2 percent. “The budget delay likely shaved 0.3 to 0.5 percentage points off growth. Growth was likely driven by still-solid, though lower, domestic demand, while negative net exports, due to strong capital goods imports, subtracted from the headline again,” Narayanan said.

“We expect growth to pick up in the second half on better infrastructure investment, continuing the upward momentum since the fourth quarter of 2017,” he added.

The Standard Chartered economist said the BSP could implement more rate cuts due to lower inflation.

“We expect BSP to start cutting rates in May and forecast a total 100 basis points of rate cuts in consecutive meetings in 2019, as we expect inflation to drop sharply in the third quarter,” Narayanan said.

Standard Chartered’s expectation of a drop in inflation in the third quarter is due to a high base and one-off boosts from tax reforms and the end of poor weather.

The bank’s average inflation forecast is at 2.7 percent in 2019, down from 5.2 percent in 2018. It also forecasts reserve requirement ratio (RRR) cuts of 200 basis points.

In the last monetary-policy meeting in March, the Monetary Board (MB) decided to keep the interest rate on the BSP’s RRP facility at 4.75 percent, with interest rates on the overnight lending and deposit facilities also kept steady.

BSP Governor Benjamin Diokno said the MB’s decision is based on its assessment that prevailing monetary-policy settings remain appropriate as inflation forecasts show consumer price growth comfortably settling within the 2 to 4 percent target range for this year and the next.

“Given these considerations, the Monetary Board is of the view that the within-target inflation outlook and firm domestic growth support keeping monetary-policy settings steady at this time,” Diokno said in a statement.

“Looking ahead, the BSP will continue to monitor developments affecting the inflation outlook to ensure that the monetary- policy stance remains consistent with its price-stability objective,” he added.

BSP Deputy Governor Diwa Guinigundo also said the Central Bank has revised downward its inflation forecast for the year on account of the slower-than-expected print in February this year.

The BSP expects inflation to hit 3 percent, lower than the forecast of 3.1 percent announced in the previous monetary-policy meeting. For the 2020, the BSP retained its forecast at 3 percent.