BPI sees no more rate hikes in the offing

After jacking up key interest rates five times for a total 175 basis points this year, the Bangko Sentral ng Pilipinas (BSP) may keep its key interest rates steady through end-2019 as the country’s inflation rate eases to targeted levels, according to a lead economist of the Bank of the Philippine Islands.

In a press briefing yesterday, BPI’s Emilio Neri Jr. said the inflation-targeting BSP, however, could have room to slash the reserve requirement of banks by as much as two percentage points if the country’s inflation rate descends to the lower end of the target range of 2-4 percent. This could happen starting June 2019, he added.

At 18 percent, the reserve requirement—or the ratio of deposits and deposit substitutes that banks are required to set aside as buffer and therefore unable to convert into higher-earning assets—is the highest among Southeast Asia’s five largest economies.

“We believe that the BSP may no longer need to hike policy rates in its December policy meeting as lower monthly Philippine inflation prints are expected beginning November 2018 through end-2019 compared to the 6.7 percent prints seen in October and September,” Neri said.

Based on BPI’s most recent estimates, which assume that global oil prices will be more manageable compared to this year’s unusual surge of more than 40 percent, Philippine inflation may start to fall below 4 percent by mid-2019 and average at 3.6 percent next year compared to the overshooting 5 percent this year. The assumption is that oil prices based on West Texas Intermediate (WTI ) benchmark may rise by less than 5 percent in 2019.

Thiery Apoteker, economist at European economic research group TAC Economics, said in a joint press briefing with Neri that oil prices would likely be on a downtrend for most of next year. This could bring oil prices based on Brent crude to fall to about $50 per barrel by the first quarter of 2020 or slightly above $40 per barrel for WTI.

“We expect demand for oil to slow down next year at a time when US oil production will increase,” Apoteker said. “For all the large oil-importing countries, that will be a very significant support in terms that inflationary pressure will be removed and there will be room to maneuver because of the decline.”

Even at $53-per barrel WTI price, Apoteker said this would still be high enough to encourage another massive increase in US oil output. He noted US oil production had increased by two million barrels per day by end September compared to the same period last year.

With a more favorable oil price background, BPI sees a benign inflation rate environment supporting a gross domestic product (GDP) growth of at least 6.5 to 7 percent next year.

The BSP would even be able to hasten the pace of its reserve requirement reduction if the government approved the increase in the central bank’s capitalization since this would allow it to mop up excess liquidity through its market-based policy tools, Neri said.

BPI’s statistical model showed the recent BSP rate hikes would slow down the growth of total borrowing activity from commercial banks but was far from triggering a decline in borrowing activity.