RRR could be cut should inflation slow

INFLATION likely slowed in April as food prices continued to drop, analysts said, even as they were divided on the central bank’s next policy move, with some expecting a steady stance despite room to ease and a cut in banks’ reserve requirement ratio (RRR) instead.

A BusinessWorld poll of 10 economists yielded a 3.1% median headline inflation estimate for the month, which if realized will be slower than the 3.3% pace recorded in March and the 4.5% posted in April last year. This will also be the slowest pace seen since December 2017’s 2.9% and will mark the sixth straight month of easing. The median likewise falls within the 2.7-3.5% estimate range given by the Bangko Sentral ng Pilipinas (BSP) last Tuesday.

The Philippine Statistics Authority (PSA) will release official inflation data tomorrow.

Headline inflation averaged 3.8% last quarter, still near the upper end of the government’s 2-4% target. The BSP sees inflation averaging three percent this year.

IHS Markit Asia Pacific Chief Economist Rajiv Biswas, who gave an estimate of 3.1%, said lower food prices — especially for rice — likely caused inflation to slow last month. “An important factor constraining inflation pressures in April has been lower retail rice prices, following the implementation of the rice import liberalization law. This has helped to mitigate the impact of rising retail petrol prices in April, which have been pushed up due to rising world oil prices,” Mr. Biswas said.

Michael L. Ricafort, economist at Rizal Commercial Banking Corp. (RCBC), noted that rice prices have dropped to as low as P34-35 per kilogram, down by more than P10 from prices in September-October 2018 or when inflation hit a 6.7% nine-month peak. Sugar prices have also declined to P45-50, down by at least P15 from last year, he said.

“Inflation would likely continue to ease in April 2019 as well as in the coming months, largely driven by lower food prices… more than offsetting any uptick in food/agriculture prices due to the expected mild El Niño drought that could last up to August 2019 and some increase in global oil prices at six-month highs recently,” Mr. Ricafort said.

“Other factors that may support the easing inflation trend include the stronger peso exchange rate recently… and slower global economic growth/outlook especially in developed countries that also fundamentally lead to lower global inflationary pressures.”

DIVIDED ON POLICY MOVE
With the anticipated downtrend in inflation, analysts in a separate BusinessWorld poll were divided on the central bank’s policy decision this week, with five out of 10 expecting the BSP to hold fire despite room to ease and the others penciling in a 25-basis-point (bp) cut in key rates.

Meanwhile, five analysts expect the BSP to slash big banks’ reserve requirement ratio (RRR) — currently at 18% — on Thursday, with three predicting a 100-bp cut.

The BSP’s Monetary Board will review policy settings anew on May 9. At its March meeting, the Monetary Board kept rates within the 4.25-5.25% range, with the key rate of 4.75% still at a decade-high after the BSP fired off a series of hikes worth 175 bps last year to rein in inflation expectations after price spikes surged to as high as a nine-month peak of 6.7% in September and October.

DBS Bank economist Masyita Crystallin said the BSP is likely to keep monetary policy settings steady this week and will consider easing only to boost the economy. “Given the steady inflation deceleration, we think BSP might have enough policy space to cut rate should growth disappoint. However, for [this] week’s policy meeting, BSP is likely to stand pat while keeping the powder dry should the economy need more stimulus,” Ms. Crystallin said.

Besides inflation, the PSA will be releasing a host of economic data leading to the first-quarter gross domestic product data on May 9, hours ahead of the MB’s third policy review for 2019.

For Robert Dan J. Roces, economist from Security Bank Corp., the BSP is expected to reduce universal and commercial banks’ RRR first — which he sees happening within in the first half — before it cuts policy rates, especially with liquidity growth continuing to slow in March.

“There is a higher probability of an RRR cut soonest, definitely within H1, after M3 was reported at its slowest growth [in March] at 4.2% and a ‘data-dependent’ BSP is surely considering this given that low liquidity number… Our preliminary view is that RRR will come first and then interest rates,” Mr. Roces said.

Meanwhile, RCBC’s Mr. Ricafort, who sees a 25-bp cut in key rates and/or a reduction in RRR this week, said slower inflation “may support more dovish/accommodative monetary policy that lead to lower interest rate benchmarks.”

IHS Markit’s Mr. Biswas, who is also penciling in a 25-bp rate cut and a 100-bp RRR cut this Thursday, cited a need to ease monetary policy as real interest rates are “extremely high” following last year’s cumulative hikes.

“As a data-driven central bank, we believe the time is ripe for the Bangko Sentral ng Pilipinas to begin monetary loosening given prevailing economic conditions and the lagged impact of monetary policy on the real economy,” HSBC Global Research economist Noelan Arbis said in a report.

While expecting the BSP to cut both its key rates and the RRR this meeting, Mr. Arbis said this would a be a departure from the central bank’s recent practice of tweaking the reserve ratio between policy meetings.

“We continue to believe that the order of monetary policy easing matters. We posit that RRR cuts should take precedence over policy rate cuts, given that the effectiveness of interest rate cuts to stimulate growth is limited due to tight liquidity in the banking system… [W]e believe it would be imprudent for the BSP to cut the policy rate without cutting the RRR,” Mr. Arbis added.

Last Friday, BSP Governor Benjamin E. Diokno said in an interview with ABS-CBN News Channel on the sidelines of the Asian Development Bank’s annual meeting in Nadi, Fiji that the central bank sees room to “move faster” in easing monetary policy given the sovereign credit rating upgrade the Philippines received from S&P Global Ratings last week.

“I think the (rating upgrade) is another factor that we can now move faster this time,” Mr. Diokno had said.

“It is inevitable that we will have to cut both the reserve requirement ratio and the interest rate,” Mr. Diokno noted. “We’re starting from the previous year’s 175-point increase. That’s not normal.” — R.J.N. Ignacio