The central bank may need to tighten its monetary policy further to guard against risks to financial stability amid the rapid growth in domestic liquidity and the expected impact of the El Niño weather phenomenon, ING Bank said on Wednesday.
Joey Cuyegkeng, senior economist for Manila at ING Bank, said in a report released ahead of the Monetary Board policy meeting set for May 8 that the Bangko Sentral ng Pilipinas (BSP) will face the need to further increase the reserve requirement ratio (RRR) for banks by another one percentage point to 20 percent.
Cuyegkeng said increasing the RRR will enable the central bank to mop up excess cash from the financial system which had led to high credit growth in some sectors of the economy.
“Safeguarding the financial sector from risks remains the driving force behind additional tightening measures such as liquidity-reducing actions. The [Monetary Board’s] tune after the reserve requirement ratio [RRR] hike at the last meeting remains the same,” he said in the ING report.
On March 27, monetary authorities decided to keep the overnight borrowing and overnight lending rates at 3.5 percent and 5.5 percent, respectively, but the bank’s RRR was raised by one percentage point to 19 percent, effective from April 11.
Cuyegkeng said policy tightening should reduce the risk of credit-negative developments on at least P870-billion worth of bank credit at the moment.
That amount includes P708-billion worth of property loans as of March 2014, which now comprises 18 percent of the total loan portfolio of commercial banks. Growth of loans to the property sector averaged 21.2 percent year-on-year over the past 15 months to March 2014, Cuyegkeng added.
The amount also includes at least $3.6 billion in foreign currency deposit units (FCDU) loans “without natural hedges as of end-2013” and $5.2 billion FCDU loans to borrowers against their FCDU deposits. Policy tightening could also support the peso, which should help moderate foreign exchange risks for US dollar borrowers, he said.
The impending inflationary impact of the El Niño phenomenon was cited as another reason why the central bank must further tighten its monetary policy. The weather phenomenon, which is expected to start next month and could last until the first quarter of 2015, could act as a “wild card” in the country’s inflation environment, Cuyengkeng warned.
“In previous episodes of El Niño, headline and food inflation rates were higher by around 1 to 2 percentage points. In the past, the BSP-MB did not act to contain supply-induced inflation pressures since monetary tools affected demand-caused inflation pressures. If this is again the policy action, then BSP-MB actions would still focus on safeguarding the financial sector,” Cuyegkeng said.
The economist also sees the government resorting to more rice importation to moderate the El Niño impact on rice output and prices, adding that from the current target importation of 800,000 metric tons, imports could reach nearly 2 million MT.
Earlier, the government said the country’s inflation environment remained manageable despite its slight acceleration to 4.1 percent in April from 3.9 percent in March because of faster increments in the prices of food, electricity and petroleum products.
MAYVELIN U. CARABALLO