Analysts see cuts spurring consumption
Central Bank Gov. Eli Remolona said a 25-basis point cut in key rates might be imposed in the first half of the year and another 25 bps in the second half as part of the central bank’s role of stimulating growth.
Remolona said the banks’ reserve requirement could be reduced beginning the middle of the year. The current reserve ratio is at 5 percent for universal banks and 7 percent for financial institutions with quasi-banking functions.
Remolona said a rate cut is tabled for discussion during the BSP meeting of February 13.
The BSP rate cut plan drew positive reactions from two analysts, both saying they expected a 50-bps cut this year and 200-bps cut on the banks’ reserve ratio.
Remolona, however, downplayed a much aggressive cut of around 75 bps, citing the need for an “insurance” against inflation, though he said the BSP does not see inflation spiking for the rest of the year.
“I think we will still be within our target range,” he said.
In assessing the need for a rate cut in its forthcoming meeting, Remolona said the BSP is looking into the reasons for the slower than expected GDP growth last year of 5.6 percent.
“We’re growing at a little bit below capacity and whether that number widens, that gap, between our capacity and how much we’re really growing (will be a factor in the next meeting,” he said.
The BSP is likewise waiting for the January inflation number, said Remolona.
The government’s policy setting group, the Development Budget Coordination Committee (DBCC), has set an inflation target of 2-4 percent up until 2028.
The rate cuts would be a welcome development to stimulate consumption, said Jonathan Ravelas, managing director at emanagement for Business and Marketing Services (EMBM).
“The key is to see the recovery of consumers from the rising prices. The recovery will help stabilize the growth. Consumption accounts 70 percent of the economy,” said Ravelas as he described the development as “welcome moves to help ease cost of doing business.”
“How can the market recover when consumers still feel the high prices,” he added.
Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said that the central bank’s plan to cut the reserve requirement will release an additional P330 billion liquidity in the banking system that can be used for “more lending activities at lower lending rates due to lower intermediation costs.”
“Demand will increase for loans/credit and boost investments, trade, employment, and more business/economic activities, thereby leading to faster GDP growth,” he said.