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Central bank to ‘go slow’ on interest rate cuts

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BANGKO SENTRAL ng Pilipinas (BSP) Governor Benjamin E. Diokno said monetary policy easing will not be as “aggressive” this year compared to 2019 and will be delivered at a slower pace as inflation is expected to stay within target, and with other data showing the economy remains strong.

In an interview with the ABS-CBN News Channel (ANC) on Monday morning, Mr. Diokno said they have “a lot of room” for further monetary policy adjustments this year after the 75 basis points (bps) in cuts it implemented in 2019.

However, he said the central bank will “go slow” on easing benchmark rates this year and will remain data-dependent.

The central bank’s policy-setting Monetary Board (MB) will have its first meeting for this year on Feb. 6.

“Maybe not as aggressive as last year because we are in a very nice place right now. We have low unemployment… I’m optimistic that the economy [will grow] between 6.5-7% this year and we even have an inclusive growth. As you can see, the data says that in 2015, the poverty incidence was around 23.3%… Now it’s down to 16.6% in 2018,” Mr. Diokno said during the interview. “We’re doing great. We’re in a very nice place right now, so we’ll go slow in our monetary easing.”

The BSP’s 75 bp worth of policy rate reductions last year partially unwound the 175 bp in hikes fired off in 2018 amid rising inflation.

Mr. Diokno added that the government has a lot of fiscal space with a “financeable” budget deficit, which is capped at 3.2% of gross domestic product (GDP) this year, as the ongoing tax reform program will be able to increase state revenues.

Meanwhile, Mr. Diokno said they also see “some area for cutting” banks’ reserve requirement ratios (RRR).

The BSP trimmed the RRR of some banks by a total of 400 bps last year. The reserve ratio for universal and commercial banks now stands at 14%, while those for thrift and rural banks are at five percent and three percent, respectively.

Sought for comment, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri said the MB will likely cut the BSP’s overnight reverse repurchase (RRP) rate during their meeting next month and pause the following month if inflation remains on track.

“While we don’t recommend it, we think the Monetary Board will cut the RRP on their Feb. 6 meeting as January 2020 inflation will still remain within target. We believe they may pause on their March 19, 2020 meeting, however, as the trajectory of more recent inflation prints point to a possible breach of the target this year,” Mr. Neri said in an e-mail.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said the Monetary Board will likely resume easing at its February meeting on the back of benign inflation and the lower-than-expected GDP growth rate of 5.9% logged in 2019.

“However, the January 2020 inflation number, slated to be released next week, will have to be importantly plugged in with the decision to stay or cut further. Initially, we were looking at volatile global oil prices and the potential impact of a bigger eruption of the Taal Volcano as potential upside risks to the inflation view.” Mr. Asuncion said.

In a note to journalists, Nicholas Antonio T. Mapa, senior economist at ING Bank NV-Manila, also said a 25-bp cut is possible in the February meeting, followed by another reduction of the same magnitude at the MB policy meeting in May.

Meanwhile, as for banks’ reserve ratios, both BPI’s Mr. Neri and UnionBank’s Mr. Asuncion said another two-percentage point reduction can happen this year.

Mr. Neri said the banks’ loan portfolio returning to double-digit growth served as a “sign that the RRR cuts are leading banks to lend more.”

INFLATION
The central bank chief said they remain confident that the headline inflation rate will average at around three percent for the year, which will settle at the midpoint of the government’s 2-4% target range.

“So our projection is that inflation will be in the neighborhood of 3% this year, plus or minus 1% and even next year. We’re very confident that what we’ve seen in 2018 will not recur this year and next year,” he said.

Amid fears that Taal Volcano’s recent eruption may cause food prices to spike, Mr. Diokno said such natural disasters do happen and said “we should not panic.”

Headline inflation in December picked up to 2.5% from the previous month’s 1.3%, bringing the full-year average to 2.5%, within the central bank’s 2-4% target range for the year but a tad higher than its forecast of 2.4%.

January inflation data will be released on Feb. 5, a day before the BSP’s Monetary Board meets to review their policy settings.

BPI’s Mr. Neri said the inflation rate for rice will likely pick up in April due to base effects. If so, he said this could trigger another reduction in policy rates but warned that “this could be risky.”

For UnionBank’s Mr. Asuncion, the impact of the Taal eruption as well as the volatility of global oil prices “have been relegated to low risks.”

The alert level status of Taal Volcano was reduced to level three on Sunday from the level four status maintained for two weeks straight or since its eruption on Jan. 12. — Beatrice M. Laforga





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