Interest rate, bank reserve cuts still premature, says BSP official

MANILA, Philippines — It may still be too early to discuss moves to cut policy rates or banks’ reserve requirement ratio (RRR) with the year-to-date inflation still averaging above target, a senior official of the Bangko Sentral ng Pilipinas (BSP) said yesterday.

Inflation last February slowed to an 11-month low of 3.8 percent, easing within the BSP’s target of two to four percent. However, inflation in the first two months of the year averaged 4.1 percent, still slightly above the target.

“It may be premature to talk about a possible reduction in either the policy rate or the RRR at this time considering that the year-to-date inflation remains above the target of two to four percent,” BSP Deputy Governor Diwa Guinigundo said in a text message.

“More important, our latest forecasts for the next two years are anchored on the current policy rate of 4.75 percent But these policy issues will remain on the table. Timing is the crucial issue,” he said.

According to Guinigundo, the BSP continues to consider the country’s current monetary setting as “appropriate” given the emerging risks both domestically and abroad.

He said the Monetary Board would meet this month to review the central bank’s monetary policy stance.

Inflation has continuously slid from a peak of 6.7 percent in September last year to finally reach 3.8 percent this February, the first time in 11 months that inflation settled within target.

The BSP, in a statement, said the latest inflation outturn of 3.8 percent is consistent with its expectations of the continued easing of price pressures.

In line with this, the central bank said it sees inflation settling within the two to four percent target range in 2019 and 2020 as previous monetary and non-monetary policy actions take effect.

The central bank cited, in particular, the newly enacted Rice Tariffication Act, which is said would further temper rice prices in the near-term and help raise productivity in the agricultural sector.

“The BSP continues to keep a close watch over price developments in the country and shall consider all relevant information at its next monetary policy meeting on 21 March 2019 to ensure that the monetary policy stance remains consistent with the BSP’s primary mandate of safeguarding price stability,” the BSP said.

Meanwhile, ANZ Research said the slowdown in core inflation at 3.9 percent in February also supports a “broad-based easing in price pressures.”

“The data also supports the BSP’s view that inflation is likely to average within its target range in the first quarter of 2019,” ANZ said.

With inflation settling lower than expected, ANZ Research said it expects the BSP to keep rates unchanged at its meeting on March 21.

On the other hand, ING Bank Manila senior economist Nicholas Mapa said the easing of inflation back within target presents incoming BSP Governor Benjamin Diokno room “to think about easing off the brakes and look to help support the growth side of the equation.”

“Ben Diokno, appointed late on Monday evening has spent his career on the fiscal side of the fence and has indicated that the ‘role of the BSP is to ensure sustained inclusive growth.’  With the price goal seemingly in hand, it may be time for the BSP to consider possibly reducing the reserve requirement ratio in the near term and eventually lower policy rates to help chase the seven to eight percent growth target,” Mapa said.