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BSP official says even reserve requirement cut now may be ill-timed

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ANOTHER senior central bank official made the case for steady monetary policy settings at this week’s meeting, saying it may not be opportune to cut even banks’ reserve requirement just yet.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said that the central bank is unlikely to start rolling back the 175-basis-point (bp) increase in benchmark rates just yet, noting that monetary authorities have to see first how the higher yields are working through the market.

“You don’t immediately reverse course. You have to give yourself a few more observations and make sure that what you intend to achieve is on the process of being achieved,” Mr. Guinigundo told reporters late Friday.

“We want to make sure that we go back to the 2-4% inflation target. But if you simply reduce the RR (reserve requirement) or reduce the policy rate in order to reverse what you did in 2018, [that] would be bad economic policy.”

The Monetary Board will hold its first rate-setting meeting for 2019 on Thursday. The BSP fired off five consecutive rate hikes last year to arrest surging inflation, marked with a back-to-back 50bp tightening move just as prices were surging by multiyear highs.

By December, the BSP saw scope to keep policy settings steady at 4.25-5.25% amid signs that inflation is on its way down, marked by two consecutive months of a sharp decline.

Last week, Deputy Governor Maria Almasara Cyd Tuaño-Amador also said that the central bank can afford to allow previous policy hikes to “work their way through the system,” noting that future rate decisions will be “timely” and “prudent.”

Market participants expect inflation to soften further from December’s 5.1%, but Mr. Guinigundo said: “You have to give yourself the time to review how the policy worked itself through the various channels of monetary policy — credit is one, inflation expectations is another, interest rate channel is another, so ayan ang titingnan mo (you have to look at those),” the BSP official added. “Yes, 5.1% is a big decline from the 6.3%, but it is still out of the target range of 2-4%.”

BusinessWorld’s latest poll among 12 economists yielded a median forecast of 4.55% for January inflation, which if realized will mark the third straight month of slower price increases. Official data will be out tomorrow.

Mr. Guinigundo also echoed concerns over calls for the BSP to cut bank reserves, as he highlighted the need for “tight” liquidity conditions before further RR cuts can be considered.

He added that year-to-date inflation should clock below four percent before the reserve standard is tweaked. — Melissa Luz T. Lopez