BSP seen cutting rates, bank reserve ratio next week

MANILA, Philippines — British banking giant HSBC said the Bangko Sentral ng Pilipinas (BSP) may reverse its tightening episode next week by reducing interest rates as well as the level of deposits banks are required to keep with the central bank.

HSBC economist Noelan Arbis said the BSP is likely to slash interest rates by 25 basis points and at the same time reduce the reserve requirement ratio (RRR) by 100 basis points during its rate-setting meeting on May 9 as the case continues to build to begin monetary loosening.

“Better late than never, but it’s even better now than later. There are mounting reasons to begin monetary loosening in the Philippines. Inflation has continued to moderate with manageable upside risks, growth is likely to trend downwards in 1Q19, and monetary conditions are at their tightest in many years,” Arbis said.

As a data-driven central bank, Arbis said 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.

Inflation eased for five straight months to a 15-month low of 3.3 percent in March after peaking at 6.7 percent in September and October. It averaged 3.8 percent in the first quarter or within the BSP’s two to four percent target range.

“BSP officials have sounded a more neutral tone given near-term inflationary risks. This is perhaps prudent considering elevated global oil prices and a dry weather spell caused by El Niño. But we believe these supply-side risks to inflation are largely transitory,” Arbis said.

HSBC sees inflation hovering above the midpoint of the BSP’s target range throughout the second quarter including the impact of higher oil, fruits, and vegetable prices.

In the third quarter, HSBC sees inflation falling below three percent due to base effects and benign demand-side pressures. Inflation is expected to ease to 3.1 percent this year after accelerating to 5.2 percent last year from 2.9 percent in 2017.

Early this week, BSP Governor Benjamin Diokno said the reduction of interest rates and the resumption of the lowering of the RRR are inevitable and monetary authorities are just determining the right timing.

“As things normalize, naturally, we should move towards normalization,” Diokno said.

The BSP’s lifted rates by 175 basis points in five straight rate-setting meetings between May and November last year to prevent inflation from spiralling out of control.

Likewise, Diokno said the regulator is resuming the reduction of the RRR to single digit level by 2023.

“To me, that is also clear because we have one of the highest reserve ratio in this part of the world. So its clear that we need to reduce that to be more competitive,” Diokno said.

Last year, the BSP slashed the RRR level by 200 basis points in March and in June to 18 percent from 20 percent, releasing P190 billion in additional funds into the financial system to support the growing economy.