Policy rate tweaks seen on hold

The Bangko Sentral ng Pilipinas (BSP), which has guided surging inflation to a lower level in recent months, is seen to assume a dovish stance on interest rates and pause a while in making appropriate policy adjustments.

The BSP will likely slash borrowing costs as early as the 9 May meeting to help bolster slowing growth momentum with its price stability mandate safeguarded

This was the consensus forecast from a number of economists in the wake of significantly lower headline inflation in December averaging only 5.1 percent. The consensus was for inflation averaging at least 5.6 percent.

Rajiv Biswas, chief economist at IHS Markit for Asia-Pacific, said the sharp decline in the consumer price index is a reflection of the impact of the reduction in global oil prices during the period when food supply bottlenecks, particularly on rice, stabilized prices.

“The CPI inflation rate is forecast to moderate to around 4 percent by mid-2019, allowing the BSP to keep policy rates on hold in the coming months after significant monetary policy tightening measures were applied through a series of rate hikes during 2018.,” Biswas said.

Sunlife of Canada Philippines Inc. chief investment officer Michael Enriquez said via a text message they likewise see a pause in the policy rate adjustment mechanism of the BSP as the reduction in the 2018 year-end inflation confirms the notion the headline numbers have peaked.

“We expect monetary policy to be dovish moving forward. We expect more of a pause, but we might also see the resumption of the RRR (reserve requirement ratio) cuts as inflation continues to normalize,” Enriquez said.

At the Union Bank of the Philippines, its chief economist, Carlo Asuncion, shared the same sentiment as the softer-than-expected inflation print indicate the end of elevated inflation that he traced to the impact of lower global oil prices and to “declining general price levels.”

“(The) BSP, I surmise, is more inclined to pause rather than cut. It seems that external environment volatility is still very apparent. Monetary authorities are more careful now,” Asuncion said.

He holds a similar view in terms of a cut in the banks’ deposit reserve requirement, saying this should happen soon.

Similarly, ING Bank senior economist Nicholas Mapa said that with inflation leaning towards the BSP’s 2 to 4 percent target, the possibility of a turnaround in its stance has gained considerably. He said such was likely seen as early as the second-quarter this year.

“On top of BSP’s widely-anticipated 200-basis point cut to reserve requirements scheduled for the year, the BSP will likely slash borrowing costs as early as the 9 May meeting to help bolster slowing growth momentum with its price stability mandate safeguarded,” Mapa said.

“With market anticipating a less aggressive Fed rate hike cycle in 2019, BSP may be afforded a window to walk back its own aggressive rate hike salvo from 2018,” he added.