Bangko Sentral seen pausing on monetary easing

After slashing its key interest rates for the third times for a total of 75 basis points this year, the inflation-targeting Bangko Sentral ng Pilipinas (BSP) will likely pause for now before cutting the rates some more early next year, an economist from British banking giant HSBC said.

The BSP, however, may cut the reserve requirement ratio (RRR) by another 100 basis points in the fourth quarter to “inject more liquidity into the financial system at a time when liquidity usually runs tight,” Hong Kong-based HSBC economist Noelan Arbis said.

HSBC expects the BSP to cut its policy rate again by 25 basis points in the first quarter of 2020, bringing the overnight borrowing rate down to 3.75 percent.

“The Philippines still has one of the highest real rates in Asia despite [Thursday’s] cut and it is likely to remain that way if inflation remains on target and other central banks continue on their monetary easing cycle,” Arbis said.

“But a brightening growth outlook also implies that the BSP is unlikely to engage in a similar level of policy loosening in 2020 as it did this year. In our view, leaving the policy rate at around 3.75 percent provides enough real rate buffer, assuming inflation averages around 3 percent (midpoint of the BSP’s 2 to 4 percent target range), to limit financial stability risks and a build-up in demand-driven inflation,” he added.

At such level, the economist said the BSP would still have enough policy space to cut rates further in case of an economic slowdown.

But for this year, Arbis said continued reserve requirement reduction would lessen the need for additional policy rate cuts.

The reduction in the reserve requirement—or the ratio of deposits that banks cannot lend out and must keep as cash buffer—is seen to translate to higher money supply and bank lending growth without the need for much more policy rate easing in the near term.