BSP likely to keep rates, cut reserve requirement

Following a muted economic growth in the fourth quarter, the Bangko Sentral ng Pilipinas (BSP) may keep interest rates steady but loosen up monetary settings in the form of reserve requirement cuts, some economists said.

The country’s fourth quarter gross domestic product (GDP) had expanded by 6.1 percent year-on-year, slightly slower than the market consensus of 6.3 percent. This brought full-year GDP growth last year to 6.2 percent, slower than the 6.7-percent growth in 2017.

“With the 6.5 to 7 percent-growth momentum still intact and with demand remaining strong, we believe the BSP has little reason to adjust its policy rate throughout 2019,” Bank of the Philippine Islands said in a Jan. 24 research notes authored by economists Emilio Neri Jr., Rafael Alfonso Manalili and Krizia Kate Cetoy.

After raising the central bank’s overnight borrowing rate by 175 basis points last year, BPI economists believed the BSP would likely pick low-hanging fruits before considering reversing its course on the overnight borrowing rate.

“To alleviate the liquidity challenges faced by the financial system, the BSP will likely prioritize cutting the reserve requirement ratio by 2 percentage points or more in 2019 over a policy rate cut,” the economists said.

In a separate research note, British banking giant HSBC said risks of slower growth this year might prompt some monetary loosening in the form of reserve requirement ratio cuts by as much as 300 basis points to 15 percent. It also expects the BSP to keep its policy rate on hold for 2019.

HSBC expects the first 100-basis point cut to come as early as second quarter, as inflation drops within the upper-bound of the BSP’s 2-4 percent target range. The British bank expects Philippine inflation to average 3.3 percent in 2019 and 2020, barring significant supply-side or demand-side shocks.

Expectations of just one US Federal Reserve rate hike this year suggest less external pressure for the BSP to hike rates further.