BSP keeps key interest rate unchanged at 4 pct, likely to cut by 50 bps in 2020

The Philippine central bank, BSP, kept its Overnight Repurchase Rate on hold at 4 percent. BSP continues to be positive on domestic growth prospects. They expect sustained fiscal spending and favourable liquidity conditions to underpin domestic demand.

Increased public investment certainly stimulated growth in the third quarter but continues to be volatile. After rising 39 percent year-on-year in September, government spending decelerated to 1.4 percent in October. It is conceivable that the recalibration of major infrastructure projects might have led to this uneven pattern. A steadier pace is likely further out as this recalibration exercise appears to have been completed. The likely timely approval of the 2020 budget would also help.

The BSP, in the post conference session, commented that monetary policy transmission into interbank and bank rates has been widely successful though the effect on lending activity has been muted so far. Credit growth to manufacturing sector continues to be muted. Credit to households and the real estate sector is however, rebounding.

The BSP maintained its inflation forecast at 2.9 percent for 2020 and 2021. The balance of risks continues to be widely unchanged.

“We agree and expect inflation to move towards the mid-point of the target band over the next few months as base effects fade. This is not likely to warrant a change in stance from the central bank, in our view. Based on the current mix of lower-than-potential growth and a favourable inflation outlook we expect another 50bps (cumulative) in cuts in 2020. However, the BSP provided no indication on the length of its ‘prudent pause’ in its statement. Weaker than expected GDP growth in Q4, and sustained weakness in lending activity and imports may prompt the BSP to resume easing as early as Q1 next year”, said ANZ in a research report.