The Bangko Sentral ng Pilipinas is expected to resume its policy easing cycle in the first half next year to stimulate the economy, German financial firm Deutsche Bank AG said in a report.
“Given the likelihood of a negative output gap persisting for several quarters yet, we expect the BSP’s easing cycle to continue, with two more rate cuts likely in the first half of 2020 bringing the policy reverse repo rate to 3.50 percent, following the 75bp [basis points] delivered so far,” the bank said.
“The central bank still has space to ease further with CPI [consumer price index] likely to keep running in the lower half of the monetary authority’s target band of 2 to 4 percent over 2020,” the bank said.
It said the BSP would also likely deliver another 2 percentage points of reserve requirement reductions early next year, as it continued its agenda of reducing historical distortions in the monetary system.
“These cuts will take the RRR to 12 percent by end-2020 as the central bank continues its bid to reach single-digit levels by mid-2023. This additional liquidity”•including from the 4ppt of cuts undertaken in 2019″•is likely to show up in rebounding credit growth and rising asset valuations in the coming quarters”•and, in turn, in inflation down the road,” it said.
The policy-making Monetary Board of the Bangko Sentral kept the benchmark interest rate steady at 4 percent on Dec. 12, taking into account the continuing benign inflation environment.
The interest rates on the overnight deposit and lending facilities were also kept unchanged at 3.5 percent and 4.5 percent, respectively.
The Monetary Board’s decision was based on its assessment of a benign inflation environment. The latest baseline forecasts indicate that the future inflation path remains within the target range of 2 percent to 4 percent in 2020 to 2021, with well-anchored inflation expectations.
The board cut the reserve requirement ratios of banks from 14 percent to unleash more liquidity into the system. Analysts estimate that around P90 billion worth of additional liquidity is unleashed for every 1-percent cut in RRR.
Reserve requirement, also cash reserve ratio, is a central bank regulation that sets the minimum fraction of customer deposits and notes that each bank must hold as reserves.
BSP Governor Benjamin Diokno earlier said he was aiming to reduce the RRR to a single-digit level within his term.
Inflation in November reached 1.3 percent and 2.5 percent in the first 11 months, within the government’s target range of 2 percent to 4 percent.
The BSP said inflation rate in December would likely settle within a range of 1.8 percent to 2.6 percent.
The economy grew by an average of 5.8 percent in the first three quarters of 2019, near the low end of the target range of 6 percent to 6.5 percent.