Economists see RRR cuts as inflation eases

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By Melissa Luz T. Lopez, Senior Reporter

THE CENTRAL BANK may now proceed with planned cuts in bank reserves next year as inflation is sure to go down, bank analysts said.

Economists at the Bank of the Philippine Islands (BPI) and ING Bank N.V. Manila said the Bangko Sentral ng Pilipinas (BSP) may resume lowering the reserve requirement ratio (RRR) early 2019, in view of slower inflation for the coming months.

The BSP voted to keep benchmark interest rates unchanged this week, noting that inflation is expected to trek a “lower path” over the next two years as oil and food prices are on their way down.

This ended five consecutive rate hikes since May worth a total of 175 basis points (bp), with November’s 25-bp increase dubbed a “proactive” move to anchor inflation expectations.


Inflation estimates were also revised lower to 5.2% this year from an earlier 5.3% forecast. Price increases will further decelerate to 3.18% next year (from 3.5%) and to 3.04% (from 3.3%) by 2020.

This means that inflation is sure to return to the 2-4% target band over the next two years.

“The lower inflation forecasts increase the likelihood that the BSP may be done with its recent tightening cycle with the next series of moves probably in the realm of monetary easing,” said ING senior economist Nicholas Antonio T. Mapa.

“The BSP will likely slash reserve requirement ratios (RRR) as early as 1Q with inflation decelerating while domestic liquidity conditions remains tight (latest M3 growth at 8.2%).”

Reducing the mandated bank reserves will free up more cash in the financial system, as lenders can now deploy more funds for lending and investments.

The RRR is currently at 18%, down from 20% previously after two cuts which took effect earlier this year. BSP Governor Nestor A. Espenilla, Jr. has said they will go back to trimming reserve requirements next year, in line with his goal of bringing it down to single-digit level by the end of his term as central bank chief.

On the other hand, BPI lead economist Emilio S. Neri, Jr. said the central bank will likely prioritize “structural reforms” to boost money supply before actual interest rate cuts.

“In particular, a reduction in the reserve requirement ratio will likely be the next policy move of the BSP in mid-2019. We expect the central bank to cut the RRR by at least 2% next year,” Mr. Neri said in a separate commentary.

The bank analyst noted that the pressure to raise rates “has gone down significantly,” but added that rate cuts may not be introduced just yet to give time for the central bank to replenish its gross international reserves and anchor the peso-dollar rate.

On the other hand, Sanjay Mathur of ANZ Research had a less dovish view, saying that the BSP’s rate tightening cycle has ended as policy makers “conveyed greater confidence” that inflation will return to below four percent sooner.

BSP Assistant Governor Francisco G. Dakila, Jr. said on Thursday that they now expect inflation to return to below 4% by the end of the first quarter of 2019, versus their previous forecast of being above-target during the first semester.

However, Fitch Solutions said they still expect rate hikes worth 50 bps in 2019 as inflation is likely to remain above-target, despite latest pronouncements made by central bank officials.

“Although the primary objective of the BSP is price stability, we believe that further rate hikes will be necessary to address the negative real interest differential against the US, in order to reduce downside pressure on the peso,” the unit of Fitch Group said in a report.

The policy-setting Monetary Board will hold their next review on Feb. 7, 2019.