It’s not whether to cut or not but by how much

PHILIPPINES - In Brief 06 Aug 2019 by Romeo Bernardo

There is speculation about the possibility that the Monetary Board (MB) is prepared to cut policy rates by 50bp this year. It seems that the question before the MB on Thursday is not whether to cut or not but how to space the 50bp over the remaining five months.In our note last month, we noted the high likelihood of a reduction in the policy rate this Thursday. At the time, we were looking at a “normal” 25bp reduction. The US Fed’s interest rate cut last week, which caused an already large interest differential vs. the Philippines (Chart 1) to further widen, made an equivalent local policy response almost certain at this point.chart 1.Policy interest rate differentials (vs. Fed funds)Source of basic data: CEICBut would the BSP take the bolder move and cut 50bp at once? One factor supporting a bigger cut is the benign inflation outlook as the headline rate, benefiting from the freer rice trade regime and falling to 2.4% in July, is expected to remain within the BSP’s target range in 2020 (Chart 2). chart 2Inflation forecastSource: Philippine Statistics Authority (PSA)Another factor is the Duterte administration’s growth bias, with economic managers wanting to see more productive activities proceed based on lower hurdle rates. However, as one MB member told reporters, considering constraints elsewhere in the economy, lower interest rates would not necessarily translate into higher lending for economically productive activities that government wants to encourage. Indeed, some analysts are starting to worry about banks’ real estate lending, which has continued to grow faster than overall loan growth, especially given the rapid take-up of new spaces by online gaming operati...

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