Another rate cut, 2% inflation forecast in H2

Published May 20, 2020, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

Inflation rate may not drop lower than two percent level in the second quarter due to some price pressures while analysts think the Monetary Board may opt for another rate reduction after June this year.

“Inflation may not go below two percent in the second quarter due to supply constraints, but neither do we see much upward pressure with weak aggregate demand and ultra-low crude oil prices with supply overhang despite an OPEC-Russia-US production cut agreement in April,” according to Metrobank affiliate First Metro Pacific Corp. and its research partner, University of Asia and the Pacific.

The private analysts also see the Bangko Sentral ng Pilipinas (BSP) cutting the policy rate by a total 150 basis points (bps) this year.

“Monetary policy will remain easy as domestic interest rates have not dropped in synch with the US. While we saw a further 50 bps policy rate slash on April 17, 2020 to bring it to 2.75 percent, we still see a further 25 bps cut likely in early second half (2020). This means that we expect policy rates to be reduced further to 2.50 percent,” according to the latest FMIC-UA&P “Market Call” commentary.

The analysts also commented that the “rapid spread of COVID-19 in the country and around the world and most governments’ (including the Philippines) response had been for an extended lockdown. This has caused high unemployment, large cutbacks in production, income and spending which in turn egged governments to engage in unprecedented deficit spending. Disruptions in supply chains have added to producers’ problems. And so, the world and the country as well, appears to have entered unchartered territory,” they said.

FMIC-UA&P also said that the government deficit will “likely widen to seven percent to eight percent of GDP for the full year as tax revenues suffer from lack of production due to the lockdown.”

“Nevertheless, the government still has the ability to borrow more from both domestic and foreign sources in order to boost its COVID-19 response program.

Meanwhile government spending will balloon with subsidies and rebooting of infrastructure spending. However, the debt-to-GDP ratio will rise to a still reasonable level of 46-48 percent from 41.5 percent in 2019,” said the analysts.

With a prolonged COVID-19 lockdown, the assumption that the local economy will contract this year has become more probable but the decline in GDP output will not be as dramatic as in other pandemic-hit economies.