BSP seen cutting bank reserve requirement

With the Philippines now over the inflation hump, the Bangko Sentral ng Pilipinas (BSP) may start slashing the reserve requirement on banks as early as May to better oil the economy and mitigate the impact of last year’s monetary tightening, economists said.

The country’s inflation rate eased for the fifth straight month to 3.3 percent year-on-year in March from 3.8 percent in February. This was lower than the market consensus of 3.5 percent. This brought year-to-date inflation to 3.8 percent, within the government’s target range of 2 to 4 percent.

“The recent inflation downtrend gives the BSP enough space to reduce the reserve requirement ratio (RRR) sometime later in the year. The first cut may happen in June, when year-to-date inflation is well entrenched in the 2 to 4 percent target of the BSP,” Bank of the Philippine Islands said in a research note authored by economists Emilio Neri Jr., Rafael Alfonso Manalili and Krizia Kate Cetoy.

But if the first quarter gross domestic product (GDP) would be disappointing, the BPI economists see this leading to a more immediate RRR reduction during the monetary setting this May 9.

Earlier, Neri said the BSP might cut the RRR, which at 18 percent is currently one of the highest in the region, by 2 percentage points or even 3 percentage points this year.

The March inflation figure is seen to support the view that average inflation rate would remain within the 2 to 4 percent level this year, especially if global oil prices remain tame.

BPI now expects inflation to average 2.8 percent this year from 5.2 percent last year. However, BPI economists still think it would be premature to cut the policy rate in 2019 given the risks to inflation such as rising global oil prices.

“Furthermore, a rate cut doesn’t seem urgent as we still expect the economy to grow by at least 6.5 percent in this election year, whether the new budget is approved or not. With inflation now in a downtrend, the economy is likely to return to the sweet spot of low-inflation and high growth even without an immediate policy easing,” the research said.

In a separate research note, ING Philippines economist Nicholas Mapa said that with inflation within target and with BSP forecasts showing it would settle right at the 3 percent level for both 2019 and 2020, “the door to ease monetary policy remains wide open.”

“And although risks to the inflation outlook remain, the threat of oil price spikes and El Niño crop damage all emanate from the supply side of the equation and would be best addressed by measures on the supply side. With inflation now more firmly entrenched, inflation expectations anchored and demand side pressures to inflation limited, we do expect the BSP to finally consider reducing reserves in the near term and slashing its policy rate at the May 9 meeting given signs of growth slowing after several institutions scaling back their growth projections for the year,” Mapa said.

London-based Capital Economics said there was also a bigger chance that monetary authorities would cut interest rates in May.
Capital Economics said the looming prolonged dry spell due to El Niño and recent uptick in global oil prices posed small risks to consumer prices, expecting headline inflation to fall below 3 percent in April and to remain below the midpoint of the BSP’s 2 to 4 percent target range for the rest of the year.