Barclays eyes possible cut in banks’ RR rate as PHL inflation falls to 0.4% in September ‘14

By Joann Santiago

MANILA, Oct. 6 (PNA) — London-based financing firm Barclays is considering a possible cut in Philippine banks’ reserve requirements if inflation rate in the country continues to decline.

In a research note, the British multinational banking and financial services company noted that the 0.4 percent inflation rate last September is below its 0.7 percent forecast for the month and the market consensus of 0.6 percent.

Data released by the Philippine Statistics Authority (PSA) showed that the drop in inflation rate, from month-ago’s 0.6 percent brought the nine-month average to 1.6 percent, below the govenrment’s two to four percent target.

Inflation has been in record-low and below-target levels since May this year when it dropped to 1.6 percent from month-ago’s 2.2 percent.

Core inflation, which excludes volatile items like food and oil, also declined after hitting 1.4 percent from last August’s 1.6 percent. The nine-month average stood at 3.4 percent.

Barclays said the central bank “appears largely comfortable with its monetary policy stance” even with the sustained drop in inflation rate.

It, however, cited that “we believe BSP is watching liquidity conditions more closely, and it is likely to inject liquidity, possibly by easing banks’ reserve requirement ratio, if conditions were to deteriorate.”

The last time the central bank adjusted bank’s reserve requirements is in 2014 when it was hiked by a total of 50 basis points, 25 basis points each in March and May, as growth of domestic liquidity grew stronger than in the past years at a level of more than 20 percent.

To date, universal and commercial banks’ (U/KBs) have 20 percent RR rate, one of the highest in the world, which is the reason why some analysts consider a possible cut as domestic inflation continue to decelerate.

Barclays also noted that “despite today’s softer-than-expected print, we believe the medium-term risks centre around El Niño and its potential impact on agriculture.”

It explained that “while inflation remains manageable, we think policymakers are more concerned about weather risks.”

”Strong El Nino-like conditions pushed agriculture production into negative territory in Q2 15 (second quarter of 2015), and fears of food stock shortages are rising,”it pointed out.

It also noted that the estate weather bureau has warned that “ the current El Niño might be worse than the strong one experienced in 1997-1998.”

Relatively, monetary officials expect inflation to become faster in the last quarter of the year due to the impact of the dry spell on food supply.

The government has been assuring the public that food supply remains in check, due in part to the additional rice importation of the government. (PNA)