Despite higher inflation forecast, analyst sees no BSP rate cut in Q2

The Bangko Sentral ng Pilipinas (BSP) might postpone monetary policy rate cuts in the second quarter amid higher inflation forecast, an analyst said.

Union Bank of the Philippines’s Ruben Carlo O. Asuncion projects inflation to rise to 2.4 percent in May, higher than the previous month’s 2.2 percent but lower than 3.0 percent year-on-year.

“This May inflation view may mean that the [BSP] may have to hold off additional monetary policy rate cuts this Q2 [second quarter] 2020 as inflationary pressures lingers on amid the Covid-19 [coronavirus disease 2019] pandemic,” Asuncion, Unionbank Chief

Economist said.

However, he said that the Central Bank “may have to consider its other liquidity tools in addressing needs of the financial system moving forward.”

In April, the Central Bank slashed the overnight repurchased rate by 50 basis points to 2.75 percent ahead of May 21 monetary policy meeting. The BSP has cut the interest rates by 125 bp year-to-date.

Policy rate, last year, was brought down by a total of 75 bp to 4 percent.

The Monetary Board is set to meet on June 25.

After series of policy easing measures, BSP Governor Benjamin E. Diokno earlier this month said that the Central Bank was in wait-andsee mode before rendering another rate cut.

But reserve requirements could be further trimmed should the need for additional liquidity arise.

“I can assure you, if there is a need for additional liquidity, BSP will cut the reserve requirement,” he said in recent Senate hearing.

Reserve requirement ratio on reservable liabilities of universal and commercial banks were recently slashed by 200 bp to 12 percent.

Inflation

UNIONBANK attributed the higher inflation forecast to increasing rice prices.

“The Philippine Statistics Authority [PSA] has noted that farmgate price of palay [unhusked rice], yellow and white corn grains and the wholesale and retail prices of regular and well-milled rice, white and yellow corn grains have, across the board, consistently [rose] since March 2020,” Asuncion noted.

Unionbank’s May inflation forecast is within the Central Bank’s forecast ranging from 1.9 percent to 2.7 percent.

BSP considered higher domestic oil prices and agricultural products due to supply bottlenecks arising from Typhoon Ambo in coming up with the forecast.

“Meanwhile, the electricity rates in Meralco-serviced areas declined during the month despite the reported increase in the total electricity bill due to higher consumption,” it added.

For the year, Asuncion said that inf lation is seen to average at 2.8 percent, which lies within BSP target of 2 percent to 4 percent range.

Four-month inflation figure stood at 2.6 percent.