By Lee  C. Chipongian Inflation could still be on the high side of the target range in 2019, in the mid-three percent to a peak of four percent, which would present a similar environment of back-to-back rate hikes and reduction in banks’ reserve ratio. Economist Chidu Narayanan for Standard Chartered Bank said the market has been prepared for some time for an eventual aggressive response from the Monetary Board – “the BSP has put off hiking rates too much or too soon.” The central bank is unwavering in its messaging that the 2019 inflation will be within the target of two-four percent. However, Narayanan said the rate could be higher. “We expect inflation will remain high in 2019, albeit lower than in 2018,” he noted. While the BSP forecasts 3.3 percent inflation in 2019 – and this could change on August 9 – the Asia Pacific Consensus Forecasts estimates 3.7 percent, while both Oxford Economics and the Asian Development Bank forecasts 3.9 percent. The International Monetary Fund (IMF) forecasts 3.8 percent average for 2019 versus the government target of two-four percent. Narayanan said that just as he has forecasted earlier, the BSP “would be forced to hike rates this year on very loose monetary conditions exacerbated by rising inflation, weak currency and still high credit growth… I expect inflation to edge up further in July and August, forcing the BSP to hike rates by 25 bps at its August 9 meeting.” He added that the BSP would have to pair a rate hike with a cut in reserve requirement ratio (RRR) next year. “My forecast for earlier this year was for RRR cuts to be delivered along with rate hikes in the first quarter,” said Narayanan. “Standalone RRR cuts risks exacerbating upside pressure to inflation – RRR cuts would have to come with further rate hikes to help reduce inflationary pressures.” ING Bank economist Joey Cuyegkeng said the issue in a rate hike with an RRR reduction is it brings market confusion. The IMF has made a few recommendations to the BSP on the timing of RRR cuts, and according to BSP Governor Nestor A. Espenilla Jr., they are on the same page and that they have already decided to pause on further RRR cuts this year after a 200 basis points reduction – or 100 basis points each – in February and in May. “We’ve decided to stop (after the last RRR cut in May) even before the IMF made the suggestion,” said Espenilla. The IMF merely recommended to calibrate the timing of the next RRR reduction, he added. “The problem about RRR cuts in a rising and high inflation environment is that market misconstrues this not only as an accommodation via a liquidity infusion but also as counter to the tightening cycle that BSP has embarked on in May,” said Cuyegkeng, who has been closely monitoring the market behavior and volatile reaction. “IMF calls this a situation that leads to communication challenge on the stance of monetary policy.” “To avoid such misunderstanding, the next appropriate time for a RRR cut would be when inflation eases and trends towards the target range. Such a RRR cut could happen… early next year,” said Cuyegkeng. Espenilla said on July 26 that the BSP’s open market operations have neutralized the liquidity impact of the two cuts in RRR this year and that this “initiative can resume next year just as inflation returns to target based on our forecast.” The six-month inflation has averaged at 4.3 percent. The BSP forecasts inflation to range from a low of 5.1 percent to a high of 5.8 percent for the month of July, which will be released on August 7. Espenilla reiterated that the 200 basis points RRR reduction “already sends a credible and concrete signal to the financial system of BSP commitment to structural reforms so the industry can be guided accordingly in developing their long-term strategic plans.”