First Capital sees less chance for another rate cut tomorrow

• Trims probability placed on rate cut to 50% from 60% in pre-policy review in August
• Cites improved macroeconomic indicators as main reason

First Capital Research (FCR) has lowered its bets on another round of monetary policy easing by way of a rate cut announcement tomorrow as the country’s macro-economic indicators point to an improved economic health with easing financial conditions.

Hence, the research firm trimmed the probability placed on a rate cut at this week’s monetary policy meeting to 50 percent from a 60 percent assigned at their pre-policy report in August. 

“Our previous pre-policy report had assigned a 60 percent probability for a rate cut in October 2020 and 75 percent probability in November 2020. However, considering the improved macro economic indicators, we have reduced the probability of a rate cut by 10 percent to 50 percent in October 2200 and by 25 percent to 50 percent in November 2020,” FCR said. 

The Monetary Board meets for the seventh instance this Wednesday to assess if the economy needs any more monetary support to ride out pandemic’s effects. 

While they have cut policy rates by 250 basis points so far this year in four instances—with their actions have been broadly effective as seen from the indicators on credit flows to the real economy and the response of the lending rates—=they are meeting this week for the first time since the country is again confronted with the virus. 

However, since the effects of the recent discovery of a coronavirus cluster on the broader economy appear to be limited, the situation may not call for additional support. 

However, FCR analysts cited the the gross domestic product, which is expected to contract by 5.8 percent this year and the consumer confidence, which still remains muted with weak demand, as compelling reasons to consider a rate cut. 

According to other analysts, GDP growth is less of a concern for the Monetary Board in determining the trajectory of the monetary policy as almost every country gutted by the virus is expected to record a negative economic growth in 2020, with the exception of China which is expected to expand by 1.9 percent, according to the International Monetary Fund. 

FCR analysts also see the government’s heavy lean on domestic sources for funding the budget deficit, which is expected to hit 10 percent of the GDP, also to be a factor 
to cut rates. 

“Decline in domestic interest rates in response to the aggressive monetary easing delivered the required support to soften the pandemic impact on the economy, thereby maintaining low interest rate environment or further reducing interest rate to benefit the government finances,” they added. 

FCR assigned a 25 percent probability each for a 25 basis points and 50 basis points cut in key rates under their 50 percent probability assigned for a rate cut.