MANILA: Philippine central bank Deputy Governor Diwa Guinigundo said a quick reversal of last year’s monetary tightening — either through a reduction in the amount of cash that banks must hold as reserves or a cut in key interest rates — would be “bad economic or monetary policy.”

While inflation in the last two months of 2018 cooled from a nine-year high, the average annual price gain remained well above the central bank’s 2 percent to 4 percent target, he said. Monetary authorities will have to gauge how recent tightening impacted credit, interest rate and inflation expectations.

“You have to give yourself a few more observations and make sure that what you intend to achieve is in the process of being achieved,” Guinigundo told reporters after a speech to the Economic Journalists Association of the Philippines late Friday. “You don’t immediately reverse course.”

The central bank, which kept its key rate steady at 4.75 percent in December, is set to hold again at its next policy decision on Feb. 7, according to all 20 economists surveyed by Bloomberg. 

The Philippines raised the policy rate by a total of 175 basis points last year to rein in inflation that accelerated to its fastest since 2009. Data on Tuesday will probably show consumer-price growth eased for a third month to 4.5 percent in January.

Bank Reserves

Bangko Sentral ng Pilipinas cut the reserve-requirement ratio by a total of 2 percentage points to 18 percent last year. The ratio is one of the highest in Asia and the central bank is gradually bringing it to single-digit levels while lowering its reliance on the instrument for managing liquidity.

The latest reserve cut that took effect in June, releasing about 100 billion pesos ($1.9 billion) into the financial system, came at a time when there were already indications of inflationary pressures, Guinigundo said. The decision was one of the issues raised by investors during roadshows conducted by the government in U.S. and Europe in 2018, he said.

“That’s something we don’t want to do again. So we are very careful in looking at various indicators,” he said. “Yes, there is scope for adjustment, but the more important question is when do you do it. You don’t want to release signals that could be contradictory to each other and confuse the market in the process.”

Further lowering the ratio will depend on several factors. “You really have to have conditions that would warrant a reduction in the reserve requirement. This is when you have a very tight liquidity condition,” the deputy governor said. Such conditions exist when banks lack funds to lend or when interest rates begin to jump.

In other key points, he said:

The central bank expects inflation to come back within the target range by FebruaryThe bank has factored rice tariff-ication, or the liberalization of rice imports, into its inflation scenario. – Bloomberg