Are we there yet?


This is the nagging question in the market place relative to whether the Bangko Sentral ng Pilipinas (BSP) may continue or altogether halt the upward adjustment of its key interest rate policy.

From the looks of it and from what I gathered, we're not there yet. Monetary tightening may be sustained. Market players are, actually, divided with one taking the positive side of an even keel, simply because the price movements of food items and petroleum products, the major drivers of the headline inflation, over the recent past have substantially come off.

While the negative side takes into consideration the expectation by the BSP that inflation will continue to be elevated due to “strong domestic demand and supply side” bottlenecks.

Aside from geopolitical tension, pressure coming from the weather phenomenon, El Nino, is weighing down on inflation. Subsequently, the situation could lead to drought. Depletion of our water source may trigger water crisis, affecting agricultural production notwithstanding the higher demand of power with the heat index soaring.

Against this backdrop, those who believed that we are not yet there, the scenario for next Thursday, May 18, is for the BSP to continue its monetary tightening by 25 basis points (bps) and another 25 bps towards the end of June, the last interest policy rate meeting incumbent Gov. Felipe “Philip” M. Medalla will be steering before his term ends July 3. Another scenario is for a one-time, big-time 50 bps hike.

Should it be the second scenario, the cumulative 50 bps increment brings to 6.75 percent the overnight rate and it would be the first time ever that the overnight rate eclipses inflation.

Comparably, US benchmark rate of between 5 percent and 5.25 percent already overshadowed inflation, which stood at 4.98 percent. From where I stand, the BSP and the US Federal Reserve are on the same jagged edge, facing the difficult task of reigning inflation without trampling economic growth potential.

Amidst the present high interest rate environment, banks lending activities improved by 10.1 percent year-on-year in March, critical of these are the outstanding loans for production, which slowly inched up to 8.9 percent and 21.3 percent for consumer loans.

Heard from a muted source the monetary authorities are seriously considering reducing the reserve requirement ratio (RRR) next month to 10 percent, which would unleash some P300 billion in liquidity into the financial system.

The system can very well absorb the additional liquidity considering that the year-on-year M3 growth ending this March, despite the increase in consumer loans, was at the same pace, as that of the year past. Seasonally adjusted M3 marginally improved by 0.2 percent.

The reduction in RRR has long been forthcoming but was placed on hold because of the rising consumer price index. Whilst this measure may seem to be inflationary such a policy decision will provide banks more flexibility to lend.

This may happen well within next month before Gov. Philip’s one-year term expires. Up until now, it is still ambiguous on the legal basis for him to be reappointed.

Meanwhile the list of prospective candidates for the next BSP Governor is getting longer with the name of former President Gloria Macapagal-Arroyo (GMA), now incumbent Pampanga representative, added to the list. Previously, GMA was being rooted to be the Finance Secretary.
As the wheels of life churn closer to July, all eyes are wide open and ears on the ground will be the next 501 resident. Will it be a lady governor this time around or will the previous resident be coming to regain his residency or will Gov. Philip be given an extended lease of 501?

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