Tuesday, 30 June 2009

Metrobank unit sees Philippine inflation at 0.2% and BSP rate cut in July

Erik de la Cruz
Business Mirror

WITH Philippine inflation expected to decelerate to just 0.2 percent next month, the Bangko Sentral ng Pilipinas (BSP) may deliver next week its sixth cut in key interest rates since December, according to First Metro Investment Corp. (FMIC).

The strong base effect, given the high consumer prices last year, and weak demand for oil due to the global economic slowdown, will bring down inflation to below 1 percent in July and August, FMIC said in the June issue of the Market Call.

The Market Call is published every month with inputs from some economists at the University of Asia and the Pacific (UA&P). FMIC is the investment banking arm of the Metrobank Group.

“With the easing inflation outlook, we may expect yet another rate cut [of 25 basis points] in the next Monetary Board meeting scheduled on July 9 to further stimulate the apparently weak economy,” the report said.

The BSP has slashed its key policy rates by a total of 175 basis points since December to 4.25 percent for the overnight borrowing facility and 6.25 percent for the overnight lending facility, to help stimulate economic growth amid the global recession.

After five rate cuts in the past six months, central bank officials recently said they were maintaining the bias to continue easing monetary policy.

Inflation was at an 18-month low of 3.3 percent in May, and is projected to ease to 1.4 percent this month.

Expectations of further policy easing from the BSP have risen after the government early this month decided to scale back its growth estimate this year to a range of 0.8 percent up to 1.8 percent, from the previous range of 3.1 percent up to 4.1 percent.

The target revision came after first-quarter growth came in much weaker than anticipated at 0.4 percent.

The research team of FMIC and UA&P expects the gross domestic product to have expanded by 1.5 percent in the first half of the year, “either because the first-quarter advanced GDP estimates would be revised upward, or if not, the heavy government spending will be translated into actual economic activity in the second quarter.”

“What we are now expecting is an upward revision of first-quarter growth come August to around 1.8 percent, as more data [come in],” it said. “If that happens, we may see a slowdown of second-quarter growth to 1.0 percent.”

But if there is only a slight revision in the first-quarter estimates, the analysts said the additional government spending will have to be reckoned in the second quarter, with growth seen hitting 2.4 percent.

The economy, they said, was likely to have bottomed out in the first half of the year, and growth would pick up to 2.5 percent to 3.5 percent in the second half.

Full-year growth is thus expected to hit 2.4 percent, above government estimates but slower than the 3.9-percent expansion last year, taking into account “the basic trends so far” and a weak recovery in the US, Europe and Japan, and robust growth in China, they said.

The FMIC-UA&P analysts expect inflation to slowly to creep from below 1 percent in July and August up to 4.0 percent by December as the third quarter lows are dominated by base effects.

Inflation should average 3.3 percent this year and edge up to 4.2 percent next year due to higher crude-oil prices, they said.

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