BSP seen holding rates this week

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to keep policy rates on hold during its meeting this week and signal the possibility of a rate cut, according to London-based Capital Economics.

In its Emerging Asia Update for the Philippines, the research firm also said it expects a first rate cut by May, anchored on expectations that headline inflation has fallen to 4.4 percent in January 2019.

The Philippine Statistics Authority (PSA) will announce the January inflation figures today.

“The Bangko Sentral ng Pilipinas is unlikely to change policy at its meeting this week, but we expect a more dovish statement and perhaps a hint that loosening is on its way,” said economists Gareth Leather and Christina Lacovides in the report issued Friday night.

The central bank hiked policy rates by a cumulative 175 basis points last year to temper rapidly rising inflation.

Price pressures, however, have eased in recent months, falling to 5.1 percent in December 2018 from a peak of 6.7 percent in October.

The aggressive monetary policy tightening was implemented alongside non-tariff measures, addressing inflationary pressures on the supply side of the economy, particularly on food prices.

“With inflation likely to fall back within the BSP’s two to four percent target by the end of this quarter, the bank is likely to start unwinding some of last year’s tightening,” Capital Economics said.

The research firm also reiterated its earlier expectation of the BSP resuming cuts in reserve requirement this year as part of its plan to lower the rate to single digit.

“The BSP is also likely to resume cutting its reserve requirement  this year as part of the plan to lower the rate to the single digits. At his first meeting back after a leave of absence, Governor Espenilla could provide some hints as to how these reforms will proceed,” Capital Economics said.

Lowering the reserve requirement for banks injects liquidity into the system and lowers the cost of borrowing money in the country.

Banks also believe this would enable them to remain competitive amid the rise of financial technology solutions.