Philippine central bank cuts rate amid easing inflation, further reduction seen this year
MANILA, NNA – The Philippine central bank cut its key interest rate by 25 basis points to 4.25 percent on Thursday, as widely expected, as inflation continued to slow down.
Bangko Sentral ng Pilipinas hinted the “benign inflation outlook” gives room for another cut this year as a “pre-emptive move” against slowing global growth.
―― At its one-day policy meeting, the BSP decided to reduce its overnight reverse repurchase facility by 25 basis points to 4.25 percent from 4.50 percent. In May, the bank lowered the rate by 25 basis points, its first cut in nearly three years, amid slowing global growth and easing consumer prices.
―― “The Monetary Board’s decision is based on its assessment that price pressures have continued to ease since the previous meeting. Latest baseline forecasts of the BSP indicate that inflation remains likely to settle within the inflation target,” BSP Governor Benjamin Diokno said in press briefing.
―― The central bank noted the risks to the inflation outlook remain “broadly balanced” for 2019 and 2020. The bank sees inflation on the downside for 2021. “Weaker global economic prospects continue to temper the inflation outlook,” the BSP noted.
―― The BSP revised down its inflation forecast for this year from 2.7 percent to 2.6 percent, and for 2020 from 3 percent to 2.9 percent. It also released its initial 2021 inflation forecast at 2.9 percent.
―― The central bank’s decision to cut its key rate came amid slowing inflation at 2.4 percent in July, the lowest in 31 months, and the unexpected further decline in the Philippines’ economic growth at 5.5 percent in the second quarter, which is largely due to weak investment as a result of the delayed passage of the national budget.
―― In a press briefing after the announcement, BSP Deputy Governor Dennis Dakila Jr. explained there was no urgent need to implement a 50 basis points cut during Thursday’s rate-setting meeting in light of the slower-than-expected Q2 GDP.
―― “The board sees that the outlook for domestic growth continues to be firm. And the fact of projected recovery in household spending. And the accelerated implementation of the government’s infrastructure spending program. With respect to consumption spending, we see that the continued deceleration of inflation will support the recovery of consumption,” he explained.
―― On the possibility of another 25 basis points cut, Dakila also noted the BSP will look at all the information that becomes available until the next policy rate-setting on Sept. 26. “The governor said there might be a cumulative 50 basis points reduction up to the end of the year. Again, we remain data dependent and that is the direction communicated by the governor,” he said.
―― Meanwhile, Noelan Arbis, an economist at HSBC, said in an emailed note the BSP’s recent monetary decision proves it’s not “over-reacting” to the slower economic growth of the country, adding it sees the central bank cutting rates by another 25 basis points each in the fourth (Q4 2019) and the following quarter (Q1 2020).
―― “We think a 25bp cut enables the BSP to provide support for the economy amidst both domestic and external headwinds, while limiting financial stability and foreign exchange volatility risks,” Arbis said.