With inflation on a clear downtrend, the Bangko Sentral ng Pilipinas (BSP) may start to loosen its grip on monetary settings this 2019 to boost banks’ capacity to oil the economy, a joint publication of First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific. (UA&P) said.
The paper said the BSP’s policy-raising cycle had ended “as brakes on inflation get a better grip in 2019.”
However, with banks’ liquidity positions tightened by Basel 3, we expect a 2-percentage point reserve requirement cut in 2019 and a policy rate cut by the second half of 2019,” the FMIC-UA&P research said.
Basel 3 requires a complex package of reforms designed to improve the ability of bank capital to absorb losses. The framework also extends the coverage of financial risks and puts in place stronger firewalls against periods of stress.
In 2018, rising inflation prompted the BSP to turn hawkish. The inflation-targeting monetary authority raised key interest rates by a total of 175 basis points, but paused during the policy meeting in December as inflation started to ease.
The country’s annual inflation rate in November decelerated to 6 percent, slower than the market consensus of 6.3 percent and significantly easing from the 6.7-percent peak recorded in the two preceding months. The decline was mostly attributed to softer prices of major food commodities and crude oil.
Economists expected inflation to have fallen below 6 percent last December, on track to easing further and stay within the government target range next year. The forecasts for the December inflation ranged from 5.3 percent to 5.8 percent as food prices remained stable, except for some uptick due to the Christmas holidays.
The last time inflation was below 6 percent was in July, when the rate was 5.7 percent.
The FMIC-UA&P research said local inflation was expected to further decelerate to below 4 percent by the second half of 2019, thereby returning to the BSP’s target range of 2-4 percent and boosting consumer demand.
“Lower food prices and very soft crude oil prices should more than offset the increase in minimum wage and transportation rates,” the research said.
After two quarters of “sub-par” or low 6-percent growth in gross domestic product, the research expects a recovery starting in the fourth quarter of 2018 and acceleration into 2019.
“Along with robust spending on infrastructure and capital outlays, election-related spending and job generation, we think that Philippines economic growth is poised for a faster expansion in 2019,” the research said.
All told, FMIC-UA&P said the domestic economy likely grew by 6.5 percent in 2018 year, banking on a good fourth quarter output and favorable base effect.