BSP more likely to cut bank reserves than slash rates, says UA&P economist

MANILA, Philippines — Amid widespread expectations of a policy rate cut in the middle of the year because of slowing inflation, an economist of the University of Asia and the Pacific (UA&P) believes the Bangko Sentral ng Pilipinas (BSP) would prefer to be conservative, opting to not to immediately unwind the aggressive policy tightening last year. 

Several investment houses and macroeconomy research firms have pencilled in a rate cut as early as May this year following the further easing of inflation in January to 4.4 percent and the subsequent revision of the inflation outlook for the year. 

The Monetary Board kept policy rates steady at 4.75 percent last Thursday and lowered the inflation forecast this year to a range of 3.07 percent from an earlier projection of 3.18 percent. 

Instead of a rate cut, UA&P economist Victor Abola believes the BSP would be more receptive to a cut in the reserve requirement for banks rather than an immediate rate cut. 

“I don’t think the BSP will cut policy rates in the first half, but yes to cut reserve requirements to ease banks’ needs for liquidity within the first quarter. For policy rate cut, I think the BSP will wait until inflation goes below three percent year-on-year which I expect to happen in the third quarter,” he said over the weekend. 

“They will want to be conservative when cutting,” he said. 

Early this month, BSP Deputy Governor Diwa Guinigundo said the bank is not expected to immediately reverse its tightening episode despite easing inflation as monetary authorities still need to evaluate the impact of the tightening cycle last year wherein interest rates were raised by 175 basis points in response to the rapid rise in inflation and prevent second-round effects. 

Headline inflation accelerated to 5.2 percent last year from 2.9 percent in 2017 amid supply-side pressures brought about by elevated oil and food prices as well as the weakness of the peso versus the dollar. 

Growth in consumer prices nationwide eased further in January as food and beverage prices grew slower and the full effect of the second round of fuel tax hike was not yet felt. 

This was because not all gasoline stations have not yet passed on to consumers the second increase in fuel excise tax during the month. 

National Statistician Lisa Grace Bersales said the easing in the annual rate was driven mainly by slower growth in prices of food and non-alcoholic beverages, alcoholic beverages and tobacco, and transport. 

She said the inflationary pressure brought about by the full implementation of the second round of fuel excise tax hike may be tempered by the management of food supply particularly on rice.