BSP seen cutting rates by 25 bps after March

J.P. MORGAN said it expects the Monetary Board to further reduce benchmark interest rates by 25 basis points (bps) next quarter to stimulate the economy in response to the novel coronavirus (2019-nCov) outbreak.

In its “Global Watch: Asia” Economic Research note published yesterday, the bank said the outbreak could further magnify downside risks to economic growth, first manifesting in the “lackluster capex (capital expenditure) outlook this year.”

“In our view, downside risk to GDP (gross domestic product) growth has intensified owing to potential economic impact from the current 2019-nCov outbreak on the Philippine economy,” the report said.

“Amid growth concerns and a well-behaved inflation trajectory due in part to lower global energy prices, we now look for a further 25bp policy easing in 2Q20,” it said.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno signalled another possible cut by midyear in an interview with Bloomberg TV Friday.

The Monetary Board cut benchmark interest rates by 25 bps during its first rate-setting meeting of the year last week, bringing the reverse repurchase rate to 3.75%, while overnight lending and deposit rates fell to 4.25% and 3.25%, respectively.

J.P. Morgan, however, maintained its 6.2% GDP growth forecast for the Philippines, which is below the 6.5-7.5% government target. It downgraded projections for its neighbors which were also affected by the outbreak, with Hong Kong and Singapore receiving the largest downward revisions.

“Given the depth and breadth of the outbreak across borders as seen in recent days, in our view, there is some downside risk to our 6.2% y/y (year-on-year) GDP growth forecast this year, which as it is, undershoots the government’s GDP growth target of 6.5%-7.5%,” it said.

It said the outbreak’s impact will be “temporary but large” via two major channels, the first in the form of a demand shock with the panic affecting mobility, leading to declining in economic activity in tourism, offline retail sales, transportation, catering services, and entertainment.

The second will be a supply shock mainly due to factory shutdowns and supply disruptions over the near term.

“In our latest baseline scenario, we assume the contagion will peak in March and consumption will quickly recover in 2Q, while factories will reopen on Feb. 10 in most provinces (with a few exceptions), hence the supply shock will be most severely felt in February, with partial and gradual recovery throughout February and March and full recovery in 2Q,” it said.

According to preliminary estimates by the National Economic and Development Authority, a prolonged 2019-nCoV outbreak will largely hurt the tourism sector and might dent the economy by around 0.3% if the virus is felt until June. The drag on GDP is expected to rise to 0.7% if the threat remains elevated until December. — Beatrice M. Laforga