To pause or not

The best reflection going towards the “semana santa” (Lenten week) is whether the Bangko Sentral ng Pilipinas (BSP) will sustain its monetary tightening or temporarily take a breather.
The next move of the monetary authorities on May 18 is one of the ongoing concerns among economists, market players, observers and analysts. Increasing the key overnight interest rate policy appears to be the prevailing sentiment, though not in a big wave but gradual, like a quarter.
From my perspective, the appropriate direction is for the authorities to sustain its tightening in step with the movement of the US Federal Reserves, which based on the narrative of BSP Governor Felipe Medalla that the Fed’s decision almost, always is a significant “key factor” but it’s not the be all and end all.
Any pause from the BSP could be counter-productive should the Fed decide to raise its interest rates because the local currency could fall victim. At times, sentiments, for no apparent reason, influence the value of peso and this should likewise be taken into account. Although the peso, as I write this, remains relatively stable, at the high of P54.
Based on the assumption of one of my favorite CFAs (Certified Financial Analyst) Jonas Ravelas, the ugly head of inflation will continue to show with March inching down to 8.5 percent, continuing its gradual slide to 8.2 percent in April and a bit of inching up to 8.3 percent in May.
That’s for headline inflation. But, how about core inflation? Tracking down the movement of core inflation is imperative in decision-making of the monetary authorities. Core inflation measures the change in the cost of goods and services in the basket of commodities but excluding food and energy sectors, which are volatile in nature.
A pause could re-ignite inflation pressures as the cost of power is expected to take an uphill climb, not only because summer, which consequently increases the demand for power, is here but also due to El Nino.
This brings me to the question of how strong is the liquidity position of banks as reflected by its liquidity coverage ratio (LCR), a proportion of highly liquid assets held by banks and financial institutions to ensure that they maintain their ability to meet their short-term obligations such as withdrawals. Banks update this credit report monthly.
In a rising interest rate environment, it is prudent for banks to maintain just a good amount of liquidity since interest rate on deposit substitutes is also increasing.
Heard from the corridors of the BSP’s five-story building, the monetary authorities deemed it more prudent to conduct a couple of special stress tests in the aftermath of the Silicon Valley Bank fall out.
One is the LCR and the other stress test is on real estate property holdings of banks. Monetary Board member Eli Remolona recently told members of the Bankers Institute Philippines, Inc. that the Capital Adequacy Ratio (CAR) of the entire banking system is at 15.8 percent, way above the mandatory 10 percent while the LCR is 188 percent, nearly double the regulatory floor of 100 percent.
The BSP's move is very timely as Bank of America just pushed the alarm bell, warning the vulnerability of the global currency market to a liquidity crunch later in the year with tightening financial conditions and slowdown in economic growth.
As the wheels of banking continue to churn, it is a welcome relief that in both stress tests all of the country's big domestic banks passed with flying colors, including the check on the extra capital requirement imposed by the Financial Stability Board.

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