Banks still expect monetary easing

After keeping monetary settings unchanged during the first policy-setting under new Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno, economists still see the local monetary authority freeing up liquidity in the coming months.

British banking giant HSBC is expecting a 100-basis point reduction in the reserve requirement ratio before a 25-basis point cut in in the overnight borrowing rate of the BSP.  All in all, it expects the BSP to slash the reserve requirement by a total of 300 basis points and reduce the overnight borrowing rate by 50 basis points this 2019.

Security Bank also expects the BSP to cut the reserve requirement beginning with 100 basis points in an off-policy meeting between now and before the next policy meeting

The bank also expects the BSP to cut its overnight policy rate by 25-50 basis points by the second half if inflation falls and remains for one to two quarters within the extreme lower to mid-band of the target range.

In a research note issued after the BSP’s policy meeting on March 21, HSBC economist Noelan Arbis said the neutral tone at the meeting showed caution that inflation remained a risk alongside the BSP’s patience over the timing of future monetary accommodation.

“This is a welcome stance,” Arbis said, noting that it would be most prudent for the BSP to wait until inflation was more firmly within its target before engaging in any monetary accommodation.

Despite headline prices now being back within the BSP’s 2-4 percent target, Arbis said the headline and core inflation still remained near the upper-band, suggesting that price pressures remained high. “Moreover, this year’s El Niño cycle could bring upward pressures to food prices in the first half of the year given an ongoing drought in the country, while it may also cause stronger storms in the second half of the year, potentially raising prices of agricultural products,” he said.

“That said, the case to provide greater monetary accommodation is warranted as long as inflation continues to moderate as expected,” Arbis said, noting that the country’s growth would slow to 6 percent this year given a prolonged impasse on the 2019 fiscal budget and a looming ban on new public works spending ahead of the midterm elections.

“Another risk to growth is a potential decline in private investment as a result of higher bank lending rates and funding costs for corporates. Meanwhile, domestic liquidity is running tight, with excess liquidity parked at the central bank at multi-year lows,” Arbis said.

Security Bank, for its part, sees inflation ending at 3.5 percent this year, barring headwinds from oil price movements and El Niño.

“BSP is keen to maintain its data-dependency track preferring further data validation on inflation tendencies, and again signaling its dovish stance on interest rates by citing the policy space granted to emerging markets (to keep monetary rates steady) by the US Fed (Federal Reserve)’s rate guidance,” Security Bank economist Robert Dan Roces said in a research note.

“With more favorable external backdrop and more dovish turn from other central banks, the BSP could afford to cut rates but that they won’t be in a hurry given growth is generally still on positive trajectory that needs further data validation,” Roces said.