By Bianca Cuaresma, March 22 2019; Business Mirror

Image Credit to Manila Bulletin

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno announced that the Monetary Board has kept all monetary-policy rates unchanged and retained the level of the banks’ reserve requirement ratio (RRR) on Thursday’s meeting as inflation pressures eased further in recent weeks.

The newly appointed governor recently made what analysts have called “dovish comments” on handling the monetary-policy tool kit, including the possibility of multiple cuts in the RRR of banks in a year’s span.

On Thursday, however, Diokno announced to the press that they have decided to keep the interest rate on the BSP’s overnight reverse repurchase (RRP) facility at 4.75 percent, with interest rates on the overnight lending and deposit
facilities also kept steady.

“This was the first meeting for the perceived dovish Diokno who flagged threats to the growth outlook in the form of the budget impasse,” ING Bank Manila economist Nicholas Antonio T. Mapa said in his commentary following the monetary-policy announcement. “[The] BSP continues however to preach ‘data dependency’ and may await further validation that inflation will settle within target.”

Diokno said the Monetary Board’s decision is based on its assessment that prevailing monetary-policy settings remain appropriate as inflation forecasts show consumer price growth comfortably settling within the 2-percent to 4-percent target range for this year and the next.

Inflation, risks

BSP Deputy Governor Diwa C. Guinigundo also said that the Central Bank has revised downward its inflation forecast for the year on account of the slower-than-expected print in February this year.

The new inflation forecasts for this meeting hits 3 percent for 2019, revised from the 3.1 percent for 2019 in the previous monetary- policy meeting. For 2020, the BSP retained their forecast at 3 percent.

In February, inflation hit 3.8 percent—lower than the 4-percent mid-point of the BSP’s expectation during that month. The average inflation for the first two months of 2019, however, remains above the 2-percent to 4-percent target band at 4.1 percent.

“The Monetary Board also noted that the risks to the inflation outlook remained broadly balanced for 2019, even as it is observed that further risks could emerge from prolonged El Niño and higher-than-expected increases in global oil and food prices. For 2020, the risks lean toward the downside as tighter global financial conditions and geopolitical risks temper global economic activity and potential upward pressures on commodity prices,” Diokno said in his statement.

“Given these considerations, the Monetary Board is of the view that the within-target inflation outlook and firm domestic growth support keeping monetary-policy settings steady at this time. Looking ahead, the BSP will continue to monitor developments affecting the inflation outlook to ensure that the monetary-policy stance remains consistent with its price stability objective,” he added.

Growth, liquidity concerns

IN his statement, the new governor also mentioned that their assessment for growth continues to be firm for overall domestic activity, as supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure program.

However, Diokno also said there are risks to economic growth particularly if the current budget impasse in Congress is not resolved soon.

Earlier this year, the administration’s economic managers made downward revisions to the country’s growth prospects for this year to 6 to 7 percent—earlier it was 7 percent to 8 percent—due to the impact of the reenacted budget on domestic growth.

The Development Budget Coordination Committee (DBCC) also said they see a downward impact of 0.7 to 0.9 percentage points should the budget be passed in April this year. If the budget will be passed on a later month like August, however, the impact will be larger: at about 1.4 to 1.9 percent.

Guinigundo also addressed the commentaries on seemingly “tighter” monetary conditions as evidenced by the single digit in the country’s cash supply growth, saying the slowdown in M3 is a “necessary outcome” of the 175-basis- point hike in monetary policy last year.

Cuts in RRR, main rate

As to questions with the RRR, Guinigundo said the cut has always been on the table, but the issue being discussed is the timing of the cut.

“We want to make sure that if we adjust the RRR, it is consistent with the monetary policy,” he said. “It is important to get the timing right.”

ING’s Mapa said they continue to expect a RRR cut in the near term given that it remained omitted from the official policy statement at the March 21 meeting.

“Guinigundo, however, continued to maintain that the RRR and adjustments to it must move in line with the monetary-policy stance,” Mapa said. “But with domestic liquidity growth at single digits and time deposit rates elevated, we foresee a reduction the reserve requirement ratio  from 18 percent to 17 percent at an off cycle policy meeting in the next few weeks.”

Security Bank chief economist Dan Roces said that, while  cut in the RRR will be ideal to manage money supply growth in the economy, the BSP will likely be “very prudent” in cutting rates for this year, if at all.

Roces said the BSP will probably start cutting rates if inflation falls closer to the 2-percent mark consistently for about three months.