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BSP cuts key rate on virus outbreak

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By Luz Wendy T. Noble and Beatrice M. Laforga
Reporter

THE Philippine central bank cut benchmark interest rates on Thursday to take advantage of slower price increases and shield the economy from the effects of a deadly coronavirus outbreak.

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) cut the key rate by 25 basis points (bps) to 3.75% at its first policy meeting for the year, in line with market expectations.

“Prospects for global economic growth have weakened further amid geopolitical tensions,” BSP Governor Benjamin E. Diokno said at a briefing after the policy ruling.

“The spread of the 2019 novel coronavirus could have an adverse impact on economic activity and market sentiment in the coming months,” he added.

The manageable inflation environment “allowed room for a preemptive reduction in the policy rate to support market confidence,” the governor said.

BSP “would be watchful over emerging price and output conditions “to ensure that monetary policy settings remain consistent with price stability while supporting sustained noninflationary growth over the medium term,” he said.

The interest rates on the overnight lending and deposit facilities were also cut to 4.25% and 3.25%, respectively.

The decision follows 75 bps of rate cuts last year and 175 bps of rate increases in 2018 amid a high inflation environment. It matched the forecast of 10 out of 13 analysts in a BusinessWorld poll last week.

Inflation expectations continued “to be firmly anchored within the target over the policy horizon” for 2020 and 2021, Mr. Diokno said.

Upside risks to inflation include rising food prices because of the African Swine Fever outbreak and tighter global rice supply, and risks from Taal Volcano’s eruption and Typhoon Tisoy.

On the other hand, trade and economic policy uncertainties have been easing upward price pressures, Mr. Diokno said.

January inflation picked up more than expected to an eight-month peak of 2.9%, but it was still within the central bank’s comfort range.

The rate was faster than 2.5% in December but slower than 4.4% in January 2019, according to data from the Philippine Statistics Authority.

It was still within the central bank’s 2-4% target for the year.

INFLATION OUTLOOK
Also yesterday, BSP Deputy Governor Francisco G. Dakila, Jr. said the inflation outlook for this year had been raised to 3% from 2.9%, while the view for 2021 was kept at 2.9%.

Both forecasts still fall within the central bank’s 2-4% target.

Meanwhile, the Department of Finance said the novel coronavirus could slow global economic activity and oil demand, tempering inflationary pressures.

“The downtrend in crude oil prices starting January could slow down inflation going forward,” it said in an economic bulletin yesterday.

Slower global economic growth because of the virus outbreak could further cut petroleum demand and damp price pressures, it added.

The outbreak has infected thousands and killed almost 500 people, mostly in China.

Agriculture Secretary William D. Dar had agreed to adopt measures to boost food supply to further cut price pressures during a phone call with Finance Secretary Carlos G. Dominguez III, the Finance department said.

Meat, fish and vegetable price increases were faster than the average, contributing 1.09 points to the price hike, it said.

Alex Holmes, Asia economist at Capital Economics, said the central bank was likely to cut rates again this year amid a “poor outlook for the economy.”

“The Philippines is likely to be more insulated from the economic fallout of the coronavirus than most other countries in the region,” he said in a note.

“But the disruption to the tourism sector and industry will still add to the headwinds the economy faces from slowing consumption growth and weak exports,” he added.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said another rate cut could come sooner.

“I was expecting the next 25 bps in the second half of 2020 initially, but this coronavirus outbreak has pushed a critical economic decision moving forward,” he said in a text message.





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