By Melissa Luz T. Lopez, Senior Reporter
THE CENTRAL BANK has enough room to keep interest rates steady over the next few months, global banks said in separate reports, noting that attention has shifted to market liquidity now that inflation has slowed.
Foreign bank analysts said the Bangko Sentral ng Pilipinas (BSP) can afford to keep policy settings unchanged until later this year following its Thursday decision to stay on hold.
“Overall, we expect the BSP to remain on hold for a while as the economy adjusts to the policy tightening undertaken last year,” economists Mustafa Arif and Khoon Goh of ANZ Research said in a report released late Thursday.
“The recent decline in core inflation suggests that underlying pressures are easing. In our view, this is quite encouraging and provides greater confidence that the central bank will achieve its inflation target in 2019.”
The policy-setting Monetary Board kept voted to keep benchmark rates between the 4.25-5.25% range, marking the second straight meeting and keeping the key rates at the highest level seen in a decade.
The BSP said it kept rates steady amid a “manageable” inflation environment, with solid signs that inflation is indeed on a sustained decline.
Inflation eased further to 4.4% in January, marking the third straight month of decline from a peak of 6.7% in September and October last year, although still above the 2-4% target band.
Inflation remains a supply-driven concern despite the slower rate last month, the Department of Finance said in an economic bulletin on Friday.
“Productivity programs need to be implemented to reverse the price increases of fish, fruits and vegetables,” Finance Undersecretary and chief economist Gil S. Beltran said, noting that supply issues kept the prices of these three commodities higher compared to a year ago.
NO RATE CUTS?
Central bank officials also saw risks to consumer prices are “evenly balanced” for 2019, giving assurance that inflation will return to the 2-4% target band coming from last year’s 5.2% average.
BSP Assistant Governor Francisco G. Dakila, Jr. even said the monthly rate will return to below four percent by March, while the full-year forecast now stands at 3.1% for 2019, down from 3.2% previously.
The outlook is more sanguine for 2020, when inflation is seen to average three percent. The central bank noted that they will stand vigilant and will “take appropriate policy action as necessary” to keep prices in check and the financial system stable.
ANZ took this as a sign that the BSP “will not be looking to unwind some of last year’s hikes even if inflation continues to moderate further.”
In a separate report, HSBC economist Noelan Arbis held on to his view that the BSP will not budge on policy rates and will instead reduce the reserve requirement ratio (RRR) for banks this year.
In 2018, the central bank slashed the mandatory reserves by 200 basis points (bp) in two moves. This left the cash maintained by big banks at 18% of total deposits.
“With inflationary pressures easing, the BSP is signalling that it is shifting its focus toward tightness in domestic liquidity. We see no further rate hikes in 2019 and expect 300bp of RRR cuts this year, with the first 100bp likely in 2Q,” Mr. Arbis said.
BSP Deputy Governor Diwa C. Guinigundo has said further reserve cuts will depend on the year-to-date inflation print as well as inflation expectations being within target, as well as “tight” liquidity conditions that would warrant the release of around P100 billion to the economy for every 100bp reduction.
However, Mr. Guinigundo said that the local financial markets are not tight at this point, dismissing RRR adjustments anytime soon.
“We believe 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 our current inflation trajectory, inflation is likely to be more firmly within target by March (the print will come out in early April), enabling the BSP to cut the RRR any time after then,” HSBC said.
“Moreover, we expect RRR cuts to take precedent over any policy rate cuts.”
The first RRR cut took effect in March last year followed by another adjustment in June. In between these changes, policy makers fired off their first interest rate hike in May. Market watchers voiced confusion due to the seemingly contradictory thrusts, although the BSP clarified that RRR cuts should not be taken as a change in monetary policy stance.
Further RRR cuts were then shelved for the rest of 2018 as reining in surging inflation became the BSP’s main concern.

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