‘Little reason’ for BSP to again hike policy rates
Credit to Author: MAYVELIN U. CARABALLO, TMT| Date: Fri, 25 Jan 2019 16:22:39 +0000
The Bangko Sentral ng Pilipinas (BSP) will likely keep policy rates unchanged this year but will tap other instruments to infuse liquidity into the financial system, a Bank of the Philippine Islands (BPI) economist said.
“With the 6.5-percent to 7.0-percent growth momentum still intact and with demand remaining strong, we still believe the BSP has little reason to adjust its policy rate throughout 2019,” BPI Vice President and lead economist Emilio Neri Jr. said in a report issued after the release of the 2018 gross domestic product (GDP) growth figures.
GDP growth came in at 6.2 percent last year, short of the government’s downwardly revised 6.5-6.9 percent target.
After policy rate hikes totalling 175 basis points in 2018, Neri said the central bank would likely pick “low hanging fruits before considering reversing its course on the RRP (reverse repurchase rate).”
Last year’s rate hikes brought the benchmark RRP rate to 4.75 percent.
To alleviate liquidity challenges faced by the financial system, Neri said the BSP could prioritize cutting the reserve requirement ratio (RRR) by 2 percentage points or more this year.
The RRR is the proportion of current deposits that banks need to keep with the central bank against the sum they can loan out to borrowers.
One-percentage-point cuts to the ratio, currently at 18 percent, were ordered by the BSP’s policy-making Monetary Board in February and May last year.
“The other lower hanging fruit the BSP will likely pick over a sudden RRP cut is non-sterilized purchases of foreign currencies in the spot FX (foreign exchange) market,” Neri continued.
He claimed that by keeping its policy rate attractive to portfolio flows, the Bangko Sentral will not only be able to replenish its international reserves but also infuse much-needed liquidity into the funds market.
“This can have a significant effect on liquidity since every $1.0 billion the BSP purchases from the FX market translates to an expansion of high powered money by roughly about P52 billion to P54 billion,” he added.
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