BSP slashes key rates a third time

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Analysts expect the Monetary Board -- led by central bank Governor Benjamin E. Diokno -- to wind back policy rates further in either the Nov. 14 or Dec. 12 policy reviews since the year-to-date 75-basis point cumulative interest rate cut still leaves 100 bp of increases fired off last year in a bid to tame inflation pressures.

By Luz Wendy T. Noble

THE MONETARY BOARD (MB) of the Bangko Sentral ng Pilipinas (BSP) on Thursday trimmed benchmark interest rates by 25 basis points for the third time this year, in the face of continued easing of price pressures and amid the need to spur economic growth.

The latest monetary policy move slashed rates for overnight reverse repurchase (RRP), as well as overnight deposit and lending to four percent, 3.5% and 4.5%, respectively.

Banks’ reserve requirement ratio (RRR), however, was left at 16% for big banks, six percent for thrift banks and four percent for rural and cooperative banks, although BSP Governor Benjamin E. Diokno had said earlier this month that these rates could be cut further — after 200 bp reductions this year and in 2018 — by another 100 bp in any of the central bank’s weekly meetings towards yearend.

“The Monetary Board’s decision is based on its assessment that price pressures have eased further since the previous meeting… Inflation expectations also remain well-anchored within the inflation range based on the BSP’s survey of private sector economists,” Mr. Diokno told reporters in a briefing after the meeting.

He added that “[t]he Monetary Board also noted that the balance of risks to the inflation outlook has shifted toward the upside for 2020, while it is seen to tilt to the downside for 2021.”

“Upside risks to inflation over the near term emanate mainly from volatility in oil prices due to geopolitical tensions in the Middle East and from the potential impact of the African Swine Fever outbreak on food prices,” Mr. Diokno said.

“Meanwhile, the subdued pace of global economic activity continues to temper the inflation outlook.”

The third rate cut for the year comes as the government moves to rev up the economy, which expanded by a disappointing 5.5% last month — against an already tempered 6-7% official target for 2019 and last year’s actual 6.2% — due to a three-and-a-half delay in national budget enactment that left new projects unfunded.

Asked whether this could be the last adjustment in benchmark interest rates for 2019, BSP Assistant Governor Edna S. Villa replied that the central bank “looks at evolving developments” and “never pre-commits to a particular response or policy action.”

Monetary authorities on Thursday also trimmed their forecast inflation average to 2.5% from an already-downward-revised 2.6%, Ms. Villa said, adding that the forecasts for 2020 and 2021 have been retained at 2.9%.

Those forecasts fall within the BSP’s 2-4% full-year target.

“In the near term, inflation could continue to decelerate and reach the low end of the target until November 2019 due primarily to base effects as oil and rice peaked at the same period in 2018,” she explained.

Last year saw successive multi-year-high inflation rates that hit a nine-year-high 6.7% in September and October, fueling a decade-high 5.2% average for 2018.

“… [T]here is indeed room for more [rate cuts],” UnionBank of the Philippines Inc. chief economist Ruben Carlo O. Asuncion said via text, noting that there are still 100 bps left “to unwind” from last year’s cumulative 175 bp hike.

Rizal Commercial Banking Corp. chief economist Michael L. Ricafort said via e-mail that “Further cuts in local policy rates remains possible especially if the US Federal Reserve cuts its key short-term interest rates further and if local GDP growth data remain relatively soft, moving forward.”

“With the latest cut, BSP still has a significant policy space due to a 175 bps total rate hike from last year, giving the central bank enough policy leeway to support the economy for the rest of 2019 and beyond, should government spending fail to revive growth,” Mr. Robert Dan J. Roces said in an e-mail, while J.P.Morgan’s Nur Raisah Rasid said in a quick note to journalists that “[a]mid ongoing growth concerns and weaker inflation momentum, we continue to look for further monetary easing at the Dec. 12 monetary board meeting, bringing the policy rate to 3.75% by end-2019.”