Aug inflation to let BSP retain rates, analysts say

THE COUNTRY’S HEADLINE INflATION RATE LAST month would allow monetary authorities to maintain the current key interest rates of the Bangko Sentral ng Pilipinas (BSP).

This is according to ING Bank Manila senior economist Nicholas Antonio Mapa, ANZ Research analysts and Rizal Commercial Banking Corp. ( RCBC) chief economist Michael Ricafort, who issued comments after the Philippine Statistics Authority reported on Friday that consumer price growth slowed to a five-month low of 2.4 percent in August on the back of lower prices of food and non-alcoholic drinks.

Year to date, inflation averaged 2.5 percent, falling within the central bank’s 2- to 4-percent target

range for 2020.

Mapa sees inflation to remain at the lower end of the BSP’s target band, given depressed economic activity and the stronger Philippine peso limiting imported inflation.

Bangko Sentral Governor Benjamin Diokno is “also likely [to] remain sidelined as real policy rates remain negative (-0.15 percent) and we expect the BSP to keep policy levers untouched well into 2021,” he added.

ANZ analysts believe inflation would gain materially from August and is likely to settle closer to the lower end of the target range.

“As such, inflation remains a non-issue for monetary policy. At the same time, sufficient liquidity in the financial system and incomplete transmission of previous cuts in the policy rate do not make a case for further easing at this stage,” they said.

And Ricafort said the latest inflation figure was still above the key local policy rate of 2.25 percent, which “would make it fundamentally difficult [or] challenging to cut rates further amid negative net interest rates.”

The central bank’s overnight borrowing, lending and deposit rates currently stand at 2.25 percent, 1.75 percent and 2.75 percent, respectively.

Nevertheless, Ricafort expects the lack of additional funding for fiscal stimulus measures would still lead to more monetary easing measures.

“For the coming weeks/months, any further monetary easing measures, especially any further cut in banks’ RRR, remain possible as the economy needs all the support measures that it could get at this time, largely due to the adverse economic effects of the Covid-19 (coronavirus disease 2019) lockdowns/pandemic, amid the lack of additional funding for more fiscal stimulus measures, thereby making more monetary easing measures possible to help improve prospects of economic recovery, going forward,” he said.

RRR, or reserve requirement ratio, is the proportion of current deposits that banks need to keep with the central bank against the sum they can loan out to borrowers. It currently stands at 12 percent.