The Monetary Board could be “adding fuel to the fire” with its decision to cut bank reserve requirements, Credit Suisse said, given the view that current policy settings are too loose.
“The central bank took pains communicating that this is an operational shift in liquidity management and not a change in monetary policy stance. Nonetheless, we think the BSP (Bangko Sentral ng Pilipinas) risks confusing the market with this move,” the banking giant said in a report released on Monday.
The central bank last Thursday announced that its policy-making Monetary Board had approved a one-percentage point “operational adjustment to support the BSP’s shift toward a more market-based implementation of monetary policy as well as its broad financial market reform agenda.”
Effective March 2, 2018, the reduction will apply to all banks and non-bank financial institutions with quasi-banking functions that are currently required to comply with a 20-percent reserve requirement ratio (RRR).
“A range of indicators suggest that monetary policy settings could be too loose,” Credit Suisse said, adding that inflation could breach the 2.0-4.0 percent target this year — partly due to higher taxes.
Credit growth also remains strong at 16 percent year-on-year while the current account deficit continues to widen, it noted.
“Ultimately, we think real interest rates could be too low for an economy growing at 9 percent to 10 percent in nominal terms,” the bank said.
The RRR cut would be positive for bank margins but negative for the peso, Credit Suisse said.
“With the BSP remaining dovish in its statements so far with no decisive shift to raising rates yet, we see space for the currency to continue underperforming the region,” it added.
“Our FX (foreign exchange) strategist has been bearish on the PHP for some time and remains so.”
Credit Suisse in October raised its peso-dollar exchange rate outlook to P52:$1 from P51:$1 for the next 12 months.
“We continue to look for PHP to weaken through 2018 due to the Philippines’ weaker current account deficit and monetary conditions that remain too loose,” it said then.
The peso has been trading above P52 to the dollar since last week.