No need to reverse BSP rate hike, economists say

MANILA, Philippines — Amid easing inflation, some economists see no need for the Bangko Sentral ng Pilipinas (BSP) to reverse its tightening cycle that saw interest rates rise by a total of 175 basis points last year to rein in inflationary pressures.

Khoon Goh, head of Asia research at ANZ Research, said the decision of the BSP to keep interest rates on hold last Thursday provides greater confidence the two to four percent inflation target of the government would be achieved this year.

“Overall, we expect the BSP to remain on hold for a while as the economy adjusts to the policy tightening undertaken last year,” Goh said.

This is the second rate-setting meeting in a row of the BSP wherein it decided to keep interest rates unchanged as inflation continued to ease to a 10-month low of 4.3 percent in January from 5.1 percent in December.

Inflation accelerated to 5.2 percent and breached the central bank’s two to four percent target last year from 2.9 percent in 2017 due to higher oil and food prices as well as weak peso. It started breaching the target range as early as March with 4.3 percent and peaked at 6.7 percent in September and October.

This prompted the Monetary Board to lift interest rates by 175 basis points in five rate setting meetings from May to November to prevent inflation from spiraling out of control.

“Overall, we expect the BSP to remain on hold for a while as the economy adjusts to the tightening undertaken in 2018,” ANZ Research said.

Goh said the central bank is not likely to unwind some of last year’s hikes even if inflation continues to moderate further.

For his part, HSBC economist Noelan Arbis expects a reduction of the reserve requirement ratio (RRR) to take precedent over any policy rate cuts this year.

“We see no further rate hikes in 2019 and expect 300 basis points of RRR cuts this year, with the first 100 basis points likely in 2Q,” Arbis said.

According to Arbis, it would be most prudent for the BSP to wait until inflation is firmly within its target before engaging in any monetary accommodation.

Based on current inflation trajectory, the economist said inflation is likely to be more firmly within target by March, enabling the BSP to cut the RRR any time after then.

“The effectiveness of interest rate cuts to stimulate growth are limited due to tighter liquidity in the banking system amidst the highest RRR in the region,” Arbis said.