Economist bats for more RRR cuts

Published October 17, 2019, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

Inflation rate is expected to normalize in the second quarter next year or closer to the three-percent level with the central bank expected to cut interest rates just once or by 25 basis points (bps) in 2020 to give way to a more aggressive adjustment of banks’ reserve requirement ratio (RRR), according to a bank economist.

Bank of the Philippine Islands (BPI) lead economist and vice president Emilio “Jun” S. Neri said they are keeping the 2.5 percent inflation estimate for 2019 – same as the Bangko Sentral ng Pilipinas (BSP) forecast – but sees a higher 3.4 percent inflation for 2020.

Neri said right now, he’s not worried about deflation despite that inflation is currently at 0.9 percent for September. The low inflation gives more room for currency flexibility, he said. “It’s largely because of base effects (it’s) low but it gives space for example on the currency side and they (BSP) can tolerate more depreciation. (But) further easing of RRR becomes more viable (with low inflation).” He expects the peso-US dollar rate to close at P53.60 end-2019 but will depreciate to P54.60 in 2020.

Neri said banks, particularly BPI, have significant funding requirements from clients. BPI has been raising funding through issuance of LTNCDs and bonds. “Our clients want the funds. We never really saw a collapse in lending (in fact) lending is still double digit growth despite the 200 bps RRR cut and money supply being very short.”

While Neri does not see any more policy rate cut from the BSP this year – after a cumulative reduction of 75 bps – he expects the Monetary Board to slash RRR by another 100 bps. The BSP has already cut RRR by 200 bps by end-July in a series of reduction. The RRR will be reduced by another 100 bps in the first week of November.

“It will really help if the BSP can deliver more RRR cuts because some of these alternative funding sources are quite expensive,” said Neri.

As for inflation, Neri said the rate will normalize in 2020 but it is “going to be abnormally low” because of last year’s very high rate of 6.7 percent. “So, in 2020 we’ll be coming from a much lower base but we think inflation will normalize towards the three percent level. That however could be challenged by a global slowdown (and) if the global slowdown is going to be severe then maybe the inflation rate will be lower than three percent. We’re assuming that it’s not going to be a recession, it’s going to be more of a slowdown (global economy).”

By November, Neri said inflation will start to rise and “should see a turn for inflation” after the double bottoms for September and October. “(The) October figure is not going to be too far from the 0.9 percent of September but by early December when the November numbers’ printed, it should be already above one percent or close to 1.5 percent. And then from there, approach two percent for the first quarter (2020) and maybe 2.5 percent or higher in the second quarter. Again largely because of base effects,” said Neri.