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AFTER pausing monetary policy easing twice, the Bangko Sentral ng Pilipinas (BSP) may cut key interest rates again if domestic liquidity growth falls below 10 percent, according to MUFG Bank Ltd .
“In terms of M3 [domestic liquidity] growth, I assume that the BSP comfort level could be below 10 percent relative to M3 growth. Then they can be comfortable with another rate cut, ”MUFG Global Market Research Analyst Sophia Ng said in a briefing Thursday.
The Central Bank said domestic liquidity increased 14.2 percent to P13.6 trillion in August year-on-year, driven by demand for credit.
Meanwhile, the overnight reverse repurchase facility is currently at 2.5 percent after declining a total of 175 basis points (bps) so far. Overnight deposit and loan rates were 1.75 percent and 2.75 percent, respectively.
Ng said that the BSP has maintained interest rates because the financial system is still flooded with liquidity.
“The BSP clearly refrained from cutting rates in the last two meetings due to the flow of liquidity in the system, equivalent to 7.3 percent of GDP. [gross domestic products], “She explained.” Yes M3 [domestic liquidity] growth remains high until the end of the year … it is likely to delay the timing of the next rate cut. “
Still, Ng said that the BSP’s monetary policy is seen to be accommodative in the next two years as the economy struggles amid the pandemic.
“This is an indication of more rate cuts to come,” he said, noting that this covers both key policy rates and reserve requirements.
The MUFG analyst said that since M3 growth will be moderate next year, an interest rate cut could be possible in the first half of 2021.
However, Ng stressed that the BSP is likely to only cut policy rates by 25 bps due to “limited scope” due to the low inflation forecast. The drastic reduction in interest rates will widen the negative differential between inflation and interest rates.
Ng said the MUFG expects inflation to average 2.5 percent this year and 2.7 percent in 2021. Meanwhile, BSP previously shared that its forecast for the year is 2.3 percent and for 2021 it is 2.8 percent.
The Philippine Statistics Authority recently reported that inflation slowed to 2.4 percent in August from 2.7 percent the previous month, bringing the year-to-date figure to 2.5 percent. The drop in inflation was attributed to lower prices for food and non-alcoholic beverages.
“Inflationary forces on the demand side are likely to remain weak, but transportation and food prices could be higher year-over-year amid a gradual rise in oil prices,” he said.
