The Philippines central bank keeps policy rate on hold; more focus on domestic liquidity

The Philippines' central bank on Thursday kept its benchmark interest rate on hold at 4.75 per cent as widely expected by economists, while cutting inflation forecasts for 2019 and the year after.

During the meeting, the Bangko Sentral ng Pilipinas (BSP) also signalled its shift from inflationary pressures towards domestic liquidity, according to a report by HSBC economist Noelan Arbis.

While pointing out that the BSP is not seeing tightness in liquidity at this point, BSP Deputy Governor for the Monetary Stability Diwa Guinigundo said in a Bloomberg interview that a planned retail bond offering by the government could lead to tightening liquidity.

Mr Arbis noted that the BSP and local banks are now watching domestic liquidity closely, considering that excess liquidity parked with the BSP is at multi-year lows.

He expects 300 basis points of reverse repo rate (RRR) cuts this year, bringing it down to 15 per cent. The first 100 basis point cut is likely to take place in Q2, he added.

"We believe it would be most prudent for the BSP to wait until inflation is firmly within its target before engaging in any monetary accommodation," said Mr Arbis.

Inflation is likely to be more firmly within target by March (the print will come out in early April), enabling the BSP to cut the RRR any time after then, he said.

The BSP marginally lowered its latest inflation forecast for 2019 to 3.07 per cent (previously 3.18 per cent) and for 2020 to 2.98 per cent (previously 3.04 per cent).

Mr Arbis expects RRR cuts to take precedence over policy rate cuts.

"The effectiveness of interest rate cuts to stimulate growth are limited due to tighter liquidity in the banking system amidst the highest RRR in the region," he explained.

With uncertainty remaining over the path of future Fed hikes and domestic inflationary risks given the El Nino cycle, the BSP is likely to be cautious about significant monetary loosening, said the HSBC economist.