THE Bangko Sentral ng Pilipinas (BSP) on Thursday delivered on its promise to cut the country’s monetary policy rates one more time as inflation tames and growth slows in the country.
At the sixth monetary-policy meeting for the year, BSP Governor Benjamin Diokno announced that the Monetary Board decided to shave off another 25 basis points from the existing overnight reverse repurchase rate of 4.25 percent, bringing it down to 4 percent effective Friday, September 27.
The interest rates on the overnight deposit and lending facilities were also reduced accordingly to 3.5 percent and 4.5 percent, respectively.
“The Monetary Board’s decision is based on its assessment that price pressures have eased further since the previous meeting,” Diokno said in his statement following the monetary-policy meeting. “At the same time, the Monetary Board believes that prospects for global economic growth are likely to remain weak owing mainly to uncertainty over trade policies.
Firm domestic spending and progress on policy reforms will serve as a buffer against global headwinds.”
“Given these considerations, the Monetary Board believes that the benign inflation outlook provides room for a further reduction in the policy rate to support economic growth and reinforce market confidence,” the governor added.
Since being appointed as the BSP governor in March this year, Diokno already sat on five monetary policy setting meetings during his term, and three of those meetings yielded “rate cut” decisions.
Inflation will continue to fall
Diokno said the falling inflation in stark contrast to last year’s acceleration allowed them to cut their rates further. The BSP has already punched in a total 75-basis-point cut for the year.
BSP Assistant Governor Edna Villa said the BSP’s inflation forecast was slightly reduced to 2.5 percent—as revealed by the governor on Wednesday. The inflation forecasts for 2020 and 2021, however, remained unchanged.
In the near term, Villa said inflation could continue to decelerate and breach to the low end of the target range primarily due to base effects. For 2020 and 2021, the assistant governor said they took into consideration the recovery in domestic growth and the positive adjustments as the impact of the rice tariffication tapers off.
The BSP also believes 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,” Diokno said.
“Meanwhile, the subdued pace of global economic activity continues to temper the inflation outlook,” he added.
Is that all for this year?
Asked whether the BSP is done cutting rates for the year, BSP Director Dennis Lapid said their next move will depend particularly on growth prospects in and out of the country. He said they are looking at updates, particularly to the International Monetary Fund’s (IMF) World Economic Outlook.
The BSP official added that they are awaiting insights on the performance of the local economy so they are also waiting for the release of the third quarter gross domestic product (GDP) performance of the country.
For the reserve requirement ratio (RRR), meanwhile, Lapid said they are looking to closely monitor the data about the country’s liquidity conditions—such as the M3 and lending rates—to better understand the effect of deposit ratio cuts and plan their next move forward.
In a commentary following the meeting, Security Bank economist Robert Dan Roces shared this view, saying BSP guidance on further cuts to the RRR will be done after money supply and loan data is released in September 30, as this data tracks the complete effect of the prior 200-basis-point cut to the RRR.
He also said that with the latest cut, BSP still has a significant policy space due to a 175 bps total rate hike from last year. This gives the Central Bank enough policy leeway to support the economy for the rest of 2019 and beyond, should government spending fail to revive growth.
“As we have mentioned earlier, gov-ernment spending will carry the heavier burden of driving Philippine economic performance. Growth of 6 percent for the second half of 2019 is doable but increasingly challenging,” he added.