Rate cut premature given inflation risks
Credit to Author: MAYVELIN U. CARABALLO, TMT| Date: Sun, 07 Apr 2019 16:15:31 +0000
It would be premature for the Bangko Sentral ng Pilipinas (BSP) to cut key interest rates this year, Bank of the Philippine Islands (BPI) analysts said, given rising oil prices and a still-growing economy.
“We still think it’s still premature to cut the policy rate in 2019 given the risks to inflation,” the analysts highlighted in a commentary released late last week.
Global oil prices are inching higher, they noted, with the WTI benchmark now at $62.
“Furthermore, a rate cut doesn’t seem urgent as we still expect the economy to grow by at least 6.5 percent in this election year, whether the new budget is approved or not,” the analysts added.
Above-target inflation prompted the central bank’s policymaking Monetary Board to hike key interest rates five consecutive times last year, only pausing after consumer price growth began easing in November.
A third pause resulted from the last policy meeting on March 21, with monetary authorities noting the need for more data.
Other analysts, however, have said that rate cuts could come as early as May, especially following last week’s announcement that inflation had slowed further to 3.3 percent in March and — more importantly — had finally fallen within the 2.0-4.0 percent target by hitting 3.8 percent year to date.
The BPI analysts, however, said the economy was likely to return to a sweet spot of low inflation and high growth without the need for an immediate policy easing.
They pointed out that keeping the policy rate at 4.75 percent would allow the BSP to rebuild its gross international reserves (GIR), which are essential to fund the economy’s surging import requirements.
The GIR rose to a 29-month high of $83.198 billion in March, a development attributed by the central bank to its foreign exchange operations and investment income plus foreign currency deposits by the government.
“Hence, BSP will likely pick the ‘low hanging’ RRR (reserve requirement ratio) cut before considering a policy rate cut as it helps remove inefficiencies and inequities caused by this obsolete and blunt policy tool that not only discriminates against small savers but even encourages unhedged foreign currency borrowings both by the public and private sector,” the BPI analysts said.
The RRR is the proportion of deposits that banks need to keep with the central bank against the sum they can loan out to borrowers. Currently at 18 percent following two cuts last year, it is still considered as one of the highest in the region.
The BSP will likely cut the reserve requirement ratio by at least 2 percentage points for the balance of 2019, the BPI analysts said, as soon as inflation is comfortably within this year’s 2-4 percent target “to alleviate the liquidity challenges faced by the public and private sector.”
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