BSP stays policy, cuts inflation forecast

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By Luz Wendy T. Noble

THE BANGKO SENTRAL ng Pilipinas on Thursday kept monetary policy steady — as signaled earlier and expected by the market — and further cut its inflation forecast for the year.

The BSP’s Monetary Board (MB) maintained benchmark interest rates for overnight reverse repurchase, as well as overnight deposit and lending at four percent, 3.5% and 4.5%, respectively, describing current settings as “appropriate” in the face of weak global economic prospects on the one hand, as well as “firm private domestic spending and sustained progress in policy reforms” that “will serve as a buffer against external headwinds.”

“This is supported by the benign inflation outlook and a firm outlook for domestic economic growth. At the same time, a prudent pause in monetary adjustments will enable the cumulative 75-basis point reduction in policy rates as well as the cut in reserve requirement ratios to continue working their way through the economy,” BSP Deputy Governor Francisco G. Dakila, Jr. said in a briefing Thursday afternoon.

After raising benchmark interest rates by a total of 175 basis points last year in the face of successive multi-year-high inflation rates, the BSP has cut these rates by a cumulative 75 bp so far this year.

After a cumulative 200 bp cut in banks’ reserve requirement ratio (RRR) last year, the BSP has also so far cut RRR by a total of 400 bps in 2019, bringing down the reserve requirements for big banks and thrift banks to 14% and four percent by December, respectively, while rural banks’ RRR will go down to three percent.

BSP Governor Benjamin E. Diokno hinted in previous interviews with ABS-CBN News Channel and Bloomberg that the central bank is “likely done” with rate cuts for this year.

The BSP will conduct its eighth and last policy review for 2019 on Dec. 12.

Asked what would prompt the BSP to resume reducing rates next year, Mr. Dakila replied: “As we always emphasize, we remain data-driven.”

“… [F]actors to be considered will be if you would have to look at the inflation outturn again in relation to the target and then determine what would be the main reason behind the deviation.”

After clocking in multi-year highs to average 5.2% last year which was the fastest in a decade, headline inflation has been on a steady downtrend this year, averaging 2.6% in the 10 months to October against the BSP’s 2-4% target range for 2019.

Mr. Dakila said on Thursday that monetary authorities further slashed their forecast average for the year to 2.4% from the 2.5% downgraded outlook adopted in September.

At the same time, they kept their inflation forecast for 2020 and 2021 at 2.9%.

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

“At the same time, weak global economic prospects continue to temper the inflation outlook, as uncertainty over trade policies weigh on global economic activity and demand.”

For Alex Holmes, Asia economist at Capital Economics, “The decision by the central bank in the Philippines to leave its main policy rate unchanged at 4.00% today came as no surprise, and we expect the central bank to leave interest rates unchanged for the rest of 2019.”

“But with growth set to disappoint and inflation likely to remain weak, we expect more easing next year,” Mr. Holmes said in a note sent to reporters.

ING-NV Manila Senior Economist Nicholas Antonio T. Mapa said in a note: “Given a possible miss on the growth objective, we expect Governor Diokno to come out swinging in 2020 with up to 50 bps worth of policy rate cuts to help bolster growth momentum…”

“Although the exact timing may still be in question, we are confident that any form of adjustments, both policy and operational, will be guided by data and will be effectively communicated to the markets.”

Gross domestic product (GDP) growth has only lately begun to pick up from last semester’s muted 5.5% average due to subdued government spending in the wake of late national budget enactment. GDP expansion sped to 6.2% last quarter as a pickup in state expenditures added to the impetus from strong household spending. That fueled the three-quarter average to 5.8% against the government’s 6-7% goal for 2019. Socioeconomic Planning Secretary Ernesto M. Pernia has said the economy will have to grow by 6.7% this quarter if it is to hit the lower end of the government target.

Sought for comment, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a mobile phone message: “There may still be some leeway to ease monetary policy way of a further cut in local policy rates especially after the [US] Fed[eral Reserve] cut… but this could be deferred to the coming months, especially in 2020.”

Meanwhile, Security Bank Corp. chief economist Robert Dan J. Roces said in a text message: “BSP anticipates positive outcome from these cuts with looser credit, meaning more people can borrow at lower interest rates and expansion of the money supply from the RRR cuts that leads to inflation.”

“The government in effect sees more money in circulation which will stimulate the economy, and ultimately result in more money available for spending and is a function of a strong economy.”