Features Philippines Policy

Philippine central bank seen in easing mode but analysts divided over rate-cut timing

09, May. 2019

By Darlene Basingan

MANILA, NNA – The Philippine central bank is widely expected to ease reserve requirements for lenders at its next policy meeting Thursday on the heels of data showing lower inflation, but analysts are divided over whether the bank will cut its key lending rate this week.

Bangko Sentral ng Pilipinas raised the benchmark rate by a total of 175 basis points last year to 4.75 percent to tame inflation that had spiked to a 10-year high. Consumer prices have since calmed and the year-on-year rise in overall inflation eased to 3 percent in April, the lowest in 16 months.

BSP’s reserve requirement ratio – the amount of cash lenders must hold as backup – stands at 18 percent, the highest in Asia.

BSP Governor Benjamin Diokno has said he plans to slash the reserve requirement to a single digit before his term ends in July 2023.

Carlo Asuncion, chief economist at the Union Bank of the Philippines, said he expects the central bank to lower RRR by 100 basis points (a full percentage point) to 17 percent on Thursday, noting that is what the market currently needs.

However, he said he believes the bank will wait until June or July before cutting the key lending rate by 25 basis points to 4.5 percent.

“But one of the things that we are also watching is the global oil prices,” Asuncion said. “I think what’s also important is looking at how well-entrenched inflation is within the government’s target.” He said energy prices pose an upside risk for inflation, echoing concerns among government and central bank policymakers.

The consumer price index rose 3.6 percent from a year earlier in the January-April period, settling in the upper end of the official target range of 2 to 4 percent, data released Tuesday showed.

Hirofumi Suzuki, economist at Sumitomo Mitsui Banking Corp., also sees the BSP cutting the RRR by 100 basis points on Thursday, but expects the bank to hold the lending rate for now.

“If the economy grows below expectations, the BSP is likely to cut its policy rate as well,” Suzuki said.

The government trimmed its GDP target for 2019 to a range of 6 to 7 percent from 7 to 8 percent, due to the delay in getting approval for the national budget.

Hiroshi Inagaki, senior economist at Mizuho Bank, said the BSP may decide to cut its policy rate this month or next.

However, Inagaki said there is a higher possibility that the bank will lower the RRR first by 100 basis points on Thursday, adding the bank will lower the key rate by 25 basis points at the June 20 meeting and consider another cut later.

Noelan Arbis, economist at HSBC, said he expects the BSP to cut the RRR by 100 basis points to 17 percent and its policy rate by 25 basis points to 4.5 on Thursday. HSBC also expects the central bank to slash the RRR by a total of 300 basis points this year, he said.

“We believe the time is ripe for the BSP to begin monetary loosening given prevailing economic conditions and the lagged impact of monetary policy on the real economy,” Arbis said.

“The effectiveness of interest rate cuts to stimulate growth without cutting the RRR is limited due to tight liquidity in the banking system. This suggests that banks have limited room to expand their lending even if the BSP were to incentivize borrowing by reducing interest rates.”

On the other hand, Ateneo de Manila University economics professor Alvin Ang believes the BSP will leave both its key policy rate and the RRR unchanged on Thursday.

He expects the bank to cut its reserve ratio by 2 percentage points at its next policy meeting on June 20.

“Because we’re still in the election period. Remember, the government is still catching up in its spending because of the delayed budget. There might still be pressure on liquidity,” Ang said.

The central bank is expected to announce its latest monetary policy decision on Thursday afternoon, hours after the government releases first quarter gross domestic product data at 10 am local time (1100 JT/0200 GMT).