BSP has space to ease monetary policy — Diokno

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Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno

By Luz Wendy T. Noble

THE Bangko Sentral ng Pilipinas (BSP) has enough “monetary space” amid easing by central banks around the world, BSP Governor Benjamin E. Diokno said on Friday.

“I just came from Basel and the consensus is that interest rates globally will be low for a long time,” he told reporters. “In reality, we still have a lot of monetary space.”

Inflation is likely to remain stable despite the the risk of an uptick from the eruption of Taal Volcano in Batangas province, Mr Diokno said.

“The BSP expects inflation to stay on course in 2020,” the governor said. The central bank expects inflation to average “near the midpoint of the target band at 2.9%” for this year and in 2021, he said.

The government has set an inflation target of 2-4% for 2020 until 2022.

The Philippine central bank cut its benchmark interest rate by 75 basis points (bps) last year to help support the economy after raising it by a total of 175 bps in 2018.

The government is forecasting economic growth of 6.5% to 7.5% this year after the economy was estimated to have grown by 6% to 6.5% last year.

Mr. Diokno said the central bank is on track, based on its “forward guidance,” to cut the reserve requirement ratio (RRR) for banks to a single digit, in line with the regional level.

“Then we have a lot of possibilities, we have a lot of monetary space to reflect some change,” he said.

After 400 bps of cuts last year, the reserve ratio for universal and commercial banks now stand at 14%, while those for thrift and rural banks are at 5% and 3%, respectively.

Mr. Diokno said the central bank would assess the effect of Taal Volcano’s eruption on both inflation and economic growth.

Finance Secretary Carlos G. Dominguez III this week said that the National Capital Region and Calabargon — made up of the provinces of Cavite, Laguna, Batangas, Rizal and Quezon — contributed 36% and 17%, respectively to the country’s gross domestic product (GDP) in 2018.

Mr. Dominguez has also said the eruption’s effect on inflation would be minimal and manageable.

The combined effects of typhoons in December and the Taal eruption could cause inflation to spike to 3% at the start of the year, Philippine National Bank (PNB) economist Jun Trinidad said in a note on Friday.

Aside from the Taal Volcano eruption, inflation risks include increased volatility in oil prices after escalating tensions in the Middle East paired with the continued impact of the African Swine Fever outbreak, Mr. Diokno said.

There could be a “gradual uptick” in Inflation in the early part of the year because the base effects from 2018 have been diminishing, said Dennis D. Lapid, director of the BSP’s Department of Economic Research.

But slower economic growth paired with unclear trade policies in major economies could “weigh down on global economic activity and thus mitigate upward pressures on commodity prices,” he said.

Inflation in December was at 2.5% after an uptick in consumer demand during the holiday season and typhoons, among other things.

This was well within the central bank’s 2-4% target. Average inflation last year slowed to 2.5% from 5.2% in 2018.

Also on Friday, Mr. Diokno said the country is poised to achieve a “credit rating A” within two years after the government put in place structural reforms.

“Our target is to get it within two years,” he said. “And to me, the key there is structural reform,” he added, referring to tax changes and amendments to the central bank charter, among other things.

In May, S&P Global Ratings raised the country’s long-term sovereign credit rating to BBB+ from BBB, bringing it one notch away from an A-level rating.