Room to cut rates, but caution urged

THE Bangko Sentral ng Pilipinas (BSP) has enough room to resume cutting interest rates in April, a former deputy governor said, but it must also exercise caution due to potential risks.

“I think the BSP has a space to cut,” GlobalSource Partners economist and former central bank deputy governor Diwa Guinigundo told reporters on Wednesday, following lower-than-expected inflation last month.

Consumer price growth slowed to 2.1 percent in February from 2.9 percent in January, below the central bank’s estimate.

“I said, yes you can cut, but you have to be very careful because of the risks,” Guinigundo added.

“The [main] risk is in the US. Two, the possible changes in transport, fares, maybe in wages. People are saying there’s [the possibility of] an additional 100-peso increase in wages. That could be inflationary.”

With the balance of risks tilted towards the upside, the BSP will have to be “more careful, more circumspect in its pace of easing,” Guinigundo continued.

While the peso has remained stable, political and economic dynamics could introduce volatility but this could be counterbalanced by capital inflows.

“For me, even without this political noise, the BSP should always be careful in its easing policy stance, precisely because in Ameri-ca, the US Fed (Federal Reserve) is not that aggressive,” Guinigundo said.

Fresh BSP rate cuts and a continued Fed pause will narrow the interest rate differential and possibly make investors think twice about parking their funds in the Philip-pines.

“If capital flows out, then you will have a possible weakening of the peso,” Guinigundo said.

The BSP implemented three 25-basis point rate cuts last year and Guinigundo said another 25-bps reduction would be a reasonable move.

On the issue of reserve requirement ratios (RRR) being lowered further, he said the BSP would also have to be careful to not free up too much liquidity.

“Personally, for me, it’s okay because that will help provide more liquidity and credit into the system moving forward,” Guinigundo said.

“But I guess we have to be very careful also because for every one percentage point that you reduce, the RRR, you release between P300-350 billion to the system,” he added.