By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) has increasing leeway to reduce benchmark rates with more focus on domestic activity as inflation is now firmly within the 2-4 percent target range, according to a senior official.
“The BSP has the flexibility to pull back its previous tightening moves and pay greater attention to domestic demand considerations in the assessment of the monetary policy stance,” said BSP Deputy Governor Diwa C. Guinigundo.
Guinigundo said both actual headline inflation and public inflation expectations are now firmly within the two-four percent target range, while the latest baseline projections show a manageable inflation environment.
The central bank’s May 9 move to loosen policy stance by 25 basis points (bps) signals the start of a normalization process, he added.
Guinigundo also said that easing key rates, and now with the 200 bps reduction of reserve requirement ratio (RRR) for big banks and thrift banks, is consistent with monetary policy stance, given the manageable inflation amid risks of El Niño dry weather, and rising global oil prices.
“Normalization refers to the fact that the BSP undertook a strong monetary response to the supply side inflation pressures in 2018 based on evidence of second round effects alongside higher inflation expectations,” the BSP official said. The Monetary Board raised reverse repurchase (RRP) rate by a combined 175 bps last year to curb high inflation, which reached a peak of 6.7 percent for September and October.
Inflation has come down to a four-month average of 3.6 percent as of end-April, and the BSP assessed this as being firmly within the two-four percent target band.
The lower inflation has convinced the Monetary Board to cut both the policy rate and the RRR level this month.
“The primary tool for signalling the stance of monetary policy continues to be the overnight RRP rate,” said Guinigundo. “Adjustments in the RRR will continue to be aligned with the overall monetary policy stance with the inflation outlook as the primary consideration.”
In the future, when the BSP reduces RRR more, Guinigundo said any decision will be “considered in line with ongoing plans for the further enhancement of market-based monetary operations.”
The Monetary Board has concluded that there is tight liquidity in the financial system and releasing about P210 billion from the RRR cuts for big and small banks, will ease liquidity pressures.
They cited the delay in the national budget as reason for the tight liquidity because of the limited public expenditure in the first quarter.
The BSP will cut the RRR by 100 bps effective May 31, followed by 50 bps each on June 28 and July 26 for a total 200 bps, and slashing the ratio from 18 percent to 16 percent for big banks. Another 200 bps cut was decided on thrift banks, and 100 bps for rural/cooperative banks.
Guinigundo said the RRR reduction is part of the operational refinements to the interest rate corridor system and with the lower inflation for first four months of 2019, the BSP has “scope to move towards more market- based implementation of monetary policy.”
For this year, the BSP forecasts inflation at 2.9 percent, and 3.1 percent for 2020.