BSP expected to hike rates, cut bank reserve requirement in 2018

The Philippine central bank will likely hike interest rates and cut the reserve requirement next year, according to the Washington-based Institute for International Finance (IIF).

In the Philippines, India, Indonesia, Malaysia, South Korea and Thailand, “policy rates have bottomed out… except perhaps in Indonesia and India, which came late to the easing cycle and could have room for another rate cut or two, while others are in no rush to raise anytime soon,” the IIF noted in a report titled “Economic Views: Asia Six —What Next for Monetary Policy?”

The IIF said that in the Philippines, there could be a rate increase in the late 2018. However, it said the Bangko Sentral ng Pilipinas might lower first its reserve requirements on banks, which it deemed relatively high.

BSP Governor Nestor A. Espenilla Jr. had said the central bank would soon cut the reserve requirement, which was one of the highest in the world.

The reserve requirement ratio currently stands at 20 percent, which means that for every P1 of deposit and deposit substitute generated by banks, 20 centavos should be set aside as buffer which that banks cannot lend out.

Across the so-called Asia Six economies, the IIF said they “[continue] to be characterized by current account positions either in surpluses or small deficits, which are further evidence of absence of overheating.”

“Large nonresident capital inflows meant appreciating exchange rates against the dollar for most of this year and a further increase in reserves to stem upward pressures, barring the Philippines where the large surplus has shifted to a small deficit accompanied by some portfolio outflows,” the IIF said.

With regard to growth, it said that the synchronized global expansion had lifted external demand for Asia’s exports.
This and the robust domestic demand in these countries had bolstered prospects for the region, with annual real GDP (gross domestic product) increase likely to average 3 percent in South Korea, 4 percent in Thailand, over 5 percent in Malaysia and Indonesia, around 6.5 percent in the Philippines, and about 7.5 percent in India, according to the IIF.

“Asia Six central banks are also concerned about maintaining financial stability, especially checking household debt. They are likely to continue to use macro prudential regulations for this rather than the interest rate instrument, through curbs on loan-to-value ratios for property loans, checks on credit cards and tightening lending standards, most apparent in Malaysia, Thailand and South Korea, where household debt is high but stabilizing,” the IIF added.