The Monetary Board, led by new central bank governor Benjamin E. Diokno, decided to keep the policy rate unchanged at 4.75% during Thursday’s meeting. Photo by GEREMY PINTOLO, The Philippine Star

By Melissa Luz T. Lopez, Senior Reporter
THE Bangko Sentral ng Pilipinas (BSP) will likely reduce key interest rates by May, noting that policy makers are likely growing more confident after inflation forecasts were slashed anew on Thursday.
Global market watchers called for a 25 basis point (bp) cut in benchmark rates during the May 9 policy meeting.
The Monetary Board decided to keep the policy rate unchanged at 4.75%, remaining at a decade-high. Thursday’s meeting was the first led by new BSP Governor Benjamin E. Diokno, who signalled earlier this month that he is seeing “room to ease” policy settings coming from last year’s series of hikes worth a total of 175bp.
From a peak of 6.7% in September and October, inflation has steadily dropped to 3.8% in February, the lowest in a year and returning to the BSP’s 2-4% target range. However, the year-to-date average is still at 4.1%.
BSP Deputy Governor Diwa C. Guinigundo said the inflation forecast has been slashed to three percent from 3.1% previously, with authorities seeing the easing monthly print sustained for the rest of 2019.
In a commentary, Capital Economics said they see the BSP cutting rates in its next meeting, noting that latest signals from Mr. Diokno “sounded more hawkish” than they expected.
“[W]ith inflation set to fall back further over the next couple of months, we are sticking with our view that the central bank will cut interest rates at its next scheduled meeting in May,” said Asia economist Alex Holmes.
The London-based think tank also pointed out that the sustained fall in inflation should open doors for a rate cut, but flagged that the BSP appears “too optimistic” about the economic outlook.
Mr. Diokno said they see domestic activity remaining firm, despite snags drawn from delays in implementing the P3.757-trillion national budget that leaves new and continuing programs unfunded.
ANZ Research also said they see the central bank kicking off a series of rate cuts worth 75bp, starting with a 25bp cut on May 9 as signs clearly point to a sustained downtrend for inflation.
“Overall, we believe that the BSP is progressively becoming comfortable with the evolving inflation scenario. We concur with this comfort,” said ANZ chief economist Sanjay Mathur. “Our view is that the ongoing correction in inflation has opened the door to an easing cycle.”
For the reserve requirement, ANZ projects a cut of at least 200bps this year.
The reserve requirement ratio (RRR) also stood untouched this week, with Mr. Guinigundo said that it remains a live issue but that the Monetary Board members “want to get the timing right.”
HSBC economist Noelan Arbis said separately that it is “most prudent” for the central bank to wait until inflation is firmly back to target before touching the policy rates, as there remains risks like the El Niño phenomenon on food prices.
Mr. Arbis’ call is a 100bp cut in the RRR before a 25bp cut in the policy rate in the second quarter.
Currently, banks need to keep 18% of total deposits untouched, which is among the highest in the world. The BSP slashed this in two moves early last year, but paused as surging inflation became the biggest concern for policy makers.

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