Coming soon: monetary easing 2

PHILIPPINES - In Brief 20 Mar 2019 by Romeo Bernardo

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The signal from BSP Governor Benjamin Diokno was clear, i.e., there is room for monetary easing. But will the Monetary Board cut policy rates when it meets tomorrow? Very unlikely, in our view. What we think will happen is a resumption of its policy to reduce the reserve requirement ratio (RRR) on bank deposits, probably by another 100bp. The BSP reduced the RRR by 200bp in 1H18 (to 18% for commercial banks), stressing at the time that the action, which was accompanied by increased volumes offered in the term deposit facility (TDF), was policy neutral. In the event of a reduction in the RRR tomorrow, we expect the BSP to reiterate that it is a mere operational adjustment intended to reduce the tax on financial intermediation and that it would neutralize as much of the monetary impact as possible through the TDF. A 100bp RRR cut is expected to free up P90-P100 billion of domestic liquidity. Weekly TDF auctions this year have offered an average P50 billion of short-term deposits. How soon before the Monetary Board cuts policy rate? A 25bp cut is probable in 2Q19 in our view should: (a) inflation remain on a steady downtrend which will also help in anchoring inflation expectations, (b) the US Fed continue to signal a dovish stance, (c) M3 growth, which decelerated to 7.6% in January, remain subdued, and (d) 1Q19 GDP growth emerge lower than expected with fiscal policy still held hostage to squabbling in congress. Noteworthy at this time are (e) the significant decline in medium to long-term benchmark yields since the start of the year, with 10Y yields falling by about 70bp and the average by about 65bp, and (f) continuing net hot money inflows totaling over $1 billion in ...