BSP not yet done raising rates—Nomura
MANILA – The Bangko Sentral ng Pilipinas (BSP) is expected to keep raising its policy rate at least through the second quarter of 2023 as overall inflation across the country might not ease down toward 4 percent.
Japan-based Nomura group said that cumulative increase in the BSP’s overnight borrowing rate—4.25 percentage points or 425 basis points so far to 6.25 percent—during the current policy tightening cycle “is by far the most aggressive in the region.”
In a commentary penned by Euben Paracuelles and Rangga Cipta, Nomura said they believed the BSP was not yet done, in contrast with Bank Indonesia—its closest peer in Southeast Asia—which had already paused after hiking by a cumulative 225 basis points.
“The [BSP] policy statement suggested that the reason for continuing monetary tightening was to ‘anchor inflation expectations,” the group said.
Nomura also took a hint from the BSP highlighting that “with core inflation rising in February despite a modest decline in headline inflation, further monetary policy action was deemed necessary to address broadening price impulses emanating from robust domestic demand and lingering supply-side constraints.”
The economic research team at Bank of the Philippine Islands agrees (BPI), saying that the BSP may need to continue raising interest rates in the first half of the year considering the inflation outlook.
“Inflation story may become favorable in the second half of the year, barring any global commodity price shocks and provided that nonmonetary measures prove effective in normalizing the food supply situation in the country,” BPI said.
“It is only by then that we think the BSP could reasonably consider reassessing its tightening campaign,” the local bank added.
External buffers
BPI added that continued tightening may help the BSP rebuild its external buffers after having lost so much in 2022.
The bank added that BSP might also consider reducing the reserve ratio required of Philippine banks, by as much as 4 percentage points to ease domestic financial conditions.
For big players, the minimum amount of funds that they are required to have on hand is currently set at a ratio of 12 percent of their liabilities.
On the sidelines of the general membership meeting of the Chamber of Thrift Banks where BSP Governor Felipe Medalla was guest speaker, the chief regulator of banks told reporters that such a move was not a priority at this time.
He said that a reduction of this ratio works only if everyone believes that inflation has already gone down to or on the way toward the target range of 2 percent to 4 percent.
“Previously we believed this would happen by mid-year of 2023,” Medalla said. “The latest forecast is that this might not happen until the fourth quarter this year.”
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