THE Bangko Sentral ng Pilipinas (BSP) should consider cutting its rates this year, a local economist said, as threats to the country’s growth numbers are shaping up to be more pressing in 2019.
In a research analysis, ING Bank Manila economist Nicholas Mapa argued that although the BSP’s primary mandate is controlling inflation to within-target levels, Central Bank officials should look to support economic growth this year now that the price growth seems to be back on a more subdued track compared last year.
“The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable economic growth. And although we do not expect BSP to ever take their eye off inflation given their place as price stability champion, perhaps with inflation now within target, inflation expectations well-anchored, it’s time to consider why they keep inflation in check in the first place: sustainable economic growth,” Mapa said.
In 2018 the BSP hiked rates by a total of 175 basis points in order to control inflationary pressures that soared to 6.7 percent in September and October that year.
The latest print shows inflation taming back to the BSP’s 2- to 4-percent target range to hit 3.8 percent in February, with March expected to settle within the 3.1 to 3.9 percent range according to the most recent forecast from the BSP Department of Economic Research.
Inflation threats vs growth threats
Mapa acknowledged that although inflation seem to fall safely within the BSP’s target range in the coming months, threats to price growth still loom in the horizon for this year.
Among these threats include the rising oil prices in the international market, as well as the potential effect of El Niño on food supply in the coming months.
These threats, however, are all driven by the so-called cost-push forces, meaning they are in the supply side of the economy, thereby best addressed by nonmonetary policy measures—such as the recently passed rice tariffication law.
“Although threats to the inflation outlook remain, these risks emanate from the supply side of the equation with the BSP’s tool kit less effective in keeping this type of price pressures in check,” Mapa said.
“Meanwhile, threats to the growth outlook appear to be more pressing and immediate with the budget delay, El Niño crop damage and the lagged effects of BSP’s 2018 rate hike cycle all currently sapping growth momentum,” he added.
Recent economic data, according to the ING economist, paint a not-so-robust picture for economic growth, with government spending considerably not as potent as last year while the trade balance remains negative.
He also said that 2019 sees a market with tightening liquidity conditions, and decelerating inflation in an environment of an ultra-dovish Fed.
“Given this backdrop and the expectations for a Fed pause, the consensus for at least some easing among emerging market central banks appears to be warranted,” Mapa said.
The BSP is expected to conduct its next monetary-policy setting meeting on May 9.
Image credits: Nonie Reyes