DBS Bank Ltd. of Singapore slashed its inflation forecast to 5.4 percent from 5.8 percent this year despite the uncertainty on the impact of El Niño on food prices and electricity rates.
Chua Han Teng, economist for ASEAN at .DBS, said the Bangko Sentral ng Pilipinas (BSP) has recognized that headline inflation is on a decelerating path due to slower increases in food and energy-related items.
Teng said the central bank's Monetary Board is convinced that inflation is set to return to its two to four percent target band in the fourth quarter of the year.
Last May 18, the BSP slashed its inflation forecasts to 5.5 percent from six percent this year and to 2.8 percent from 2.9 percent next year.
The Monetary Board also kept its overnight reverse repurchase rate unchanged at 6.25 percent pausing its year-long aggressive hiking cycle after raising the rate by a total of 425 basis points since May last year to combat elevated inflation.
Inflation averaged 7.9 percent in the first four months of the year, still way above the BSP's two to four percent target, despite easing to an eight-month low of 6.6 percent in April from 7.6 percent in March.
'While being more sanguine on their baseline numbers than previously, the BSP's inflation risk matrix is still skewed to the upside, due to food supply constraints, uncertainty on the impact of El Niño on food prices and electricity rates, and potential adjustments to transportation fees and wages, with core inflation still higher than the headline rate,' Teng said.
Baring any shocks, BSP Governor Felipe Medalla earlier said inflation would likely ease within the two to four percent target band as early as September this year.
'While the BSP has communicated in its statement that it would keep its policy rate unchanged 'over the near term, it has left the door open to resume further monetary tightening, should actual inflation deviate higher from its current assessment,' Teng said.
The Singaporean bank believes the BSP is likely to keep key interest rates steady in the remaining five rate-setting meetings for 2023 to continue anchoring inflation expectations.
DBS also expects the BSP to lower the reserve requirement ratio (RRR) or the level of deposits banks are required to keep with the central bank by the end of next month.
'If the RRR is reduced in June, it would come in line with the end-June 2023 expiration of the pandemic-related relief measure pertaining to banks using their loans to micro, small, and medium enterprises as alternative compliance for reserve requirements,' Teng said.
Teng also echoed the clarification made by Medalla that the net effect of such cut is neutral for monetary policy.
As part of its heavy lifting, the BSP lowered the RRR by 200 basis points during the height of the COVID-19 pandemic to free up more funds in the financial system to boost economic activity.
It has committed to lower the RRR, the highest in the region, to single-digit level by 2023.
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