Another rate cut looms

Slow liquidity growth despite monetary easing? BSP chief wants answers

As the Philippines’ inflation rate eased early this year, the country’s banking industry lobbied the central bank to ease monetary policy and—after a short period of regulatory hesitation —got what it asked for.

But almost three months after the Bangko Sentral ng Pilipinas cut its key interest rate by 25 basis points and more than two months after it initiated a multiphase 200-basis-point reserve requirement reduction, the latest data showed that liquidity growth in the local financial system remained sluggish.


Now BSP Governor Benjamin Diokno wants to know why.

“I share your concern,” the central bank chief told the Inquirer, when asked about the last week’s money supply and bank lending growth data for June, which showed the former being flat and the latter slowing down on an annual basis.


In particular, Diokno said he wanted to know where the almost P200 billion in extra cash went since it was freed up by the monetary-easing moves as well as the expectations for more easing created by his clear statements favoring the infusion of more liquidity into the system.

“I have asked the technical staff to carefully look at the data, see how the additional liquidity infused into the financial system owing to the 200-basis-point cut in the reserve requirement ratio was used by banks, review the situation and be ready to brief the Monetary Board in our policy meeting on Aug. 8,” he said.

After an aggressive series of rate hikes totaling 175 basis points last year to fight off inflation, the central bank has cut its key interest rate by 25 basis points in early May and followed this up with a three-stage 200-basis-point reduction in banks’ reserve requirements from 18 percent to 16 percent, implemented from May to July.

Banks had been raising their concern about tight liquidity in the market to regulators since early this year and found a receptive ally in Diokno when he was named central bank governor in March.

The BSP chief noted, however, that the extra cash freed up likely found its way into the government’s borrowing program to fund the Duterte administration’s “Build, Build, Build” infrastructure program—a phenomenon that may still result in a growth boost for the Philippine economy.

“Preliminary estimates indicate that a big chunk of the released liquidity has gone to government securities,” he told the Inquirer.

Meanwhile, market watchers expect the BSP to cut key interest rates when it tackles its monetary policy stance on Thursday, amid easing inflation and the possibility of slower economic growth.


“Having hiked rates aggressively last year, we suspect that the central bank will cut its main policy rate by 25 basis points on Thursday. This would mark the second time this year that rates have been cut,” London-based Capital Economics said in an Aug. 2 report.

For Capital Economics, “the main reason why the BSP is easing is because price pressures have dropped.”

“Inflation fell sharply in June to 2.7 percent, from 3.2 percent in May. And data [to be] released on Tuesday [Aug. 6] are likely to show that the headline rate declined further last month. We have pencilled in a fall to 2.2 percent, which would be the lowest rate of inflation since 2016. The rate cut by the Fed earlier this week has also created some breathing room for central banks across the region to ease policy,” it explained.

“Meanwhile, GDP [gross domestic product] figures are likely to disappoint again amid evidence that last year’s rate hikes are weighing on growth. Bank lending has continued to slow and growth in the money supply remains low by past standards,” it added.

The government will report on the second-quarter GDP performance on Thursday (Aug. 8), with most economists expecting another below 6-percent growth although faster than the first quarter’s four-year low of 5.6 percent.

“As such, another rate cut seems likely on Thursday. And with inflation set to fall back further over the coming months, we doubt it will be the last in the current cycle,” Capital Economics said.

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