BSP likely to cut policy rate by 50bps this year, given lacklustre growth and soft inflation: DBS Group Research

Bangko Sentral ng Pilipinas is expected to cut policy rate by 50bps this year, given lacklustre growth and soft inflation, according to the latest report from DBS Group Research.

Philippines growth fell short to 5.6 percent from 6.3 percent in 4Q18, the lowest since 1Q15. The low growth was mainly due to 2019 budget approval delay which also include P95.3bn cut in infrastructure spending as well as weak exports.

The budget was approved on April 15, two months after operating under re-enacted budget in which new project could not be started. Budget delay and infrastructure spending cut could impact negatively on growth as the economy has relied on public investment as the main driver of growth.

In addition, this year’s El Niño and power outage has also affected growth especially on agriculture and manufacturing sectors.

On the other side, inflation has eased significantly so far this year and is likely to continue. Inflation eased to 3 percent in April, the slowest in 16 months despite El Niño and higher oil price. Domestic demand might be more subdued than most expected as the impact of delayed budget and lower exports has outweighed the impact of lower inflation rate.

Meanwhile, easing of consumer price, which has returned to BSP’s target of 2-4 percent this year, combine with slower growth momentum has provided room for the central bank to unwind last year’s monetary tightening with a combination of both RRR cut and policy rate cut.

"We think inflation would ease further this year as domestic demand remain soft and food price are stable. These two factors combined might outweigh the impact of higher oil price," the report further commented.