Economists foresee BSP lowering banks’ reserve ratio in H2

The Bangko Sentral ng Pilipinas (BSP) may cut banks’ reserve ratios in the next months with inflation expected to remain at very low levels, a Metrobank subsidiary said in a report.

First Metro Investment Corp. (FMIC) and the University of Asia and Pacific (UA&P) in the latest “Market Call” review predict a BSP easing mode in the second half of the year unlike in previous research notes and may cut banks’ reserve ratios in the next months with inflation expected to remain at very low levels, a Metrobank subsidiary said in a report.

“With very soft inflation rates, there appears to be some leeway for a slight easing in the second half via lower reserve requirements, which have been one of the highest in the region, and the elevated levels have pushed up intermediation costs,” the report said.

Both inflation and domestic liquidity are expected to remain “muted” for some time.

FMIC-UA&P said since inflation rate in the second quarter probably dropped further to 1.7 percent, they think it will decline to 1.3 percent in the third quarter due to “weak crude oil prices and stable to lower food prices.”

But, the report continued that base effects and early impact of El Nino phenomenon may bring up average inflation in the fourth quarter to two percent, still the low end of the central bank’s 2015 and 2016 inflation target of two percent to four percent.

FMIC-UA&P expects inflation rate to further drop to one percent in July from 1.2 percent in June. They think inflation will then increase a little to 1.1 percent in August and rise to 1.4 percent by September.

BSP Governor Amando M. Tetangco Jr. said on Monday that July inflation could be as low as 0.5 percent to a high of 1.3 percent.

Tetangco sees downward pressure from the lower local pump prices and power rates for the month of July.

The BSP however still sees upside risks to inflation rate despite low ranges at the moment. These upside risks include the pending petitions for power rate adjustments and the impact of strongerthan-expected El Nino dry weather conditions on food prices and utility rates.