By Lee C. Chipongian The Monetary Board of the central bank may decide to reduce the policy rates again by 25 basis points (bps) in July to boost a slack in domestic demand, according to a Metrobank Group subsidiary. “We still see a further 25 bps cut likely in (the) early second half,” said First Metro Investment Corp. (FMIC) with its research partner, University of Asia and the Pacific. “This means that we expect policy rates to be reduced further to 2.50 percent.” The Monetary Board has a scheduled June 25 policy meeting and the next will be on August 20. A July decision to cut the policy rate will be an off-cycle monetary policy action. It will not be the first time this year after an off-cyle cut was done last April to further stimulate the slowing economy due to the lockdowns. “Monetary policy will remain easy as domestic interest rates have not dropped in synch with the US,” the FMIC-UAAP’s “Market Call” said. In the first three months of 2020, the BSP cut key rates by a cumulative 125 bps. “Domestic demand, the main driver of the economy, will likely slacken further in the second quarter as two main components, consumer and investment spending, weaken anew. (But) consumers have had to make-do with spending on basic necessities given the lack of income due to the lockdowns or layoffs as firms face an uncertain future, and so their spending will likely fall in the second quarter,” said the research note. “Although aggregate demand will wane, this may not result in very low inflation rates (or deflation) because limitations on the supply side (limited output, disrupted supply chains) may have a stronger effect. Thus, we don’t expect inflation to go below two percent year-on-year in the second quarter,” said FMIC-UAAP. The Metrobank-affiliate’s outlook for the bonds market is that prices “may continue to decline for a month or two more, but should stay low in the second half. With the Fed not inclined to go for negative interest rates, bond yields will, however, remain near present levels in the short-term.” “Abundant liquidity provided by the cumulative 125 bps cut in policy rates in 2020 and the 400 bps slash in reserve requirement ratio since November 2019 and low inflation, bond yields should remain low,” FMIC-UAAP added. “The downside, although it may appear limited by BSP’s Overnight Deposit Facility (ODF) rate, may still have a little way to go since investors are still comfortable with holding bonds and the BSP may reduce its policy rates by 25 bps as early as July if economic activity remains stuck in the mud.” FMIC analysts think that corporate bond issuances could rebound after June this year but only to refinance existing debt. In the meantime, ROPs have “retained its attractiveness especially as the global economy starts to rebound in a post-COVID-19 world which should reduce ROP spreads over US Treasuries.”