UPDATE: Philippine central bank cuts key rate to 4.5% from 4.75% on tamed inflation, global risks

10, May. 2019

――Recasts with details, official comments

MANILA, NNA – The Philippine central bank on Thursday trimmed its key lending rate by 25 basis points to 4.5 percent on signs that inflation is under control. It is the first rate cut in nearly three years.

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo hinted at more rate cuts to come, saying the latest action is “not a full normalization,” but he also noted that the pace of further easing would be gradual, saying the bank remains “data dependent.”

At its one-day policy meeting, the BSP also decided to maintain the reserve requirement ratio – the amount of cash lenders must hold as backup – at 18 percent, the highest in Asia. Many market participants expected the bank to lower the ratio by 100 basis points.

BSP Governor Benjamin Diokno said the monetary board will discuss the possibility of cutting the reserve requirement next week.

Key points:

―― The BSP reduced its overnight reverse purchase facility by 25 basis points, effective Friday, saying “the inflation outlook continues to be manageable, with easing price pressures owing to the decline in food prices amid improved supply conditions.” The bank also said slower growth in domestic liquidity and credit requires careful monitoring. Earlier on Thursday, the government reported that the Philippine economy grew at the slowest pace in four years in the January-March quarter, as the delay in budget approval dented some program and infrastructure spending and exports lost steam amid the global slowdown.

―― The bank had raised the benchmark rate a total of 175 basis points up to November 2018 to 4.75 percent to tame inflation that had spiked to a 10-year high. Consumer prices have since calmed and the year-on-year rise in overall inflation eased to 3 percent in April, the lowest in 16 months.

―― After a one-day policy meeting Thursday, the bank revised down its inflation forecast for 2019 to 2.9 percent from 3 percent projected in March, while revising up its 2020 projection to 3.1 percent from 3 percent. Deputy Governor Guinigundo said the lower forecast for 2019 is due to lower inflation in recent months, slower domestic and global growth, and lower electricity rates. Guinigundo attributed the higher 2020 projection to the recent rise in the Dubai crude oil price.

―― The monetary board also took into consideration the impact of budget delays in the economy. Guinigundo said that while consumer spending picked up due to lower inflation, investment slowed a bit and public spending fell substantially. “That’s a big drop in government spending. The monetary board cannot ignore the driver of that slowdown,” he said.

Takeaway:

―― RCBC economist Michael Ricafort predicted further cuts in the key policy rate and the reserve requirement as long as inflation remains on an easing trend. Monetary easing is needed to support growth amid uncertainty caused by the U.S.-China trade row and Brexit, he said. Carlo Asuncion, chief economist at the Union Bank of the Philippines, also said the BSP may continue cutting rates, probably by another 25 basis points in June or August.