HSBC says 25bps rate cut by BSP in Q4 likely due to slow recovery, rising COVID-19 cases

On the heels of the Bangko Sentral ng Pilipinas’ (BSP) “surprise” 50 basis points interest rates cut, British financial giant HSBC Bank plc said the Philippine central bank’s monetary easing cycle is far from over as it tries to provide liquidity support for the pandemic-hit economy.

In a research note, HSBC said that the central bank’s unexpected move “makes it difficult to assess the path forward for the BSP.”

On Thursday, the BSP’s policy-setting Monetary Board slashed key interest rates by 50 basis points, citing stable inflation outlook moving forward.

BSP Governor Benjamin Diokno said effective Friday, June 26, rates will be at 2.25% for the overnight reverse repurchase (RRP) facility, the overnight deposit facility at 1.75%, and the overnight lending at 3.25%.

The move cuts policy rates to their lowest level in history.

With this, HSBC said the central bank is more likely to pause monetary easing in the coming months to assess the full impact of the latest rate cut on the economy.

“This means that the policy rate may remain steady throughout Q3 2020, when there is only one scheduled meeting for August,” it said.

The question then becomes whether or not the BSP would cut again later in the year.

“We believe the potential for a slow economic recovery in the second half—from the delayed passage of the fiscal stimulus and a continuing rise in COVID-19 cases—makes it more likely that the BSP would have cut again,” HSBC said.

“We now expect another 25bp cut in Q4, bringing the reverse repo rate to 2.00% by year-end,” it said.

To date, the central bank has reduced interest rates by a total of 175 basis points —25 basis points cut in February and 50 basis points reduction each in March, April, and May. With its latest move, the BSP has completely unwinded the 175 basis points rate hike it implemented in 2018 to arrest rising inflation.

Apart from another interest rate cut, HSBC said it expects another 200 basis points reduction in the reserve requirement ratio of banks “to provide another boost to domestic liquidity, as bank lending and government borrowing pick up as a result of any potential stimulus.”

“Nevertheless, the economic reality on the ground may have proved to be too much for the BSP to stand still,” HSCB said.

“New COVID-19 cases domestically continue to rise at a fast pace, with the country recording its highest single-day rise in cases (1,150) just two days ago on 23 June. This suggests that a full re-opening of the economy might take longer than initially expected,” it added.

Moreover, the banking giant said the government is yet to pass their proposed fiscal stimulus package, and there are risks that it could be watered down due to fiscal sustainability concerns.

Proponents of the economic stimulus package in the House of Representatives have come up with a compromise, offering to implement the measure in three phases as economic managers oppose the measure for fundability issues.  —LDF, GMA News