The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday cut the overnight borrowing rate by 25 basis points to 4.25 percent amid low inflation and the tepid economic growth.
BSP Governor Benjamin Diokno, who is also the chairman of the board, said the interest rates on the overnight deposit and lending facilities were reduced to 3.75 percent and 4.75 percent, respectively.
“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 [2 percent to 4 percent] for 2019 up to 2021,” Diokno said in a news briefing after the board meeting.
“Inflation expectations have also moderated further to levels consistent with the inflation target based on the BSP’s survey of private sector economists. Moreover, the risks to the inflation outlook continue to be seen as broadly balanced for 2019 and 2020, while they are seen to tilt to the downside for 2021,” Diokno said.
BDO Unibank Inc. chief market strategist Jonathan Ravelas said the rate reduction was expected and came hours after the Philippine Statistics Authority announced that gross domestic product growth hit a four-year low of 5.5 percent in the second quarter.
ING Bank Manila senior economist Nicholas Mapa said he was expecting the BSP to cut policy rates again by 25 bps at the September meeting given previous comments from Governor Diokno pointing to a total of 50 bps worth of rate cuts before the end of the year.
“Furthermore, we expect the BSP to reduce the reserve requirements further in the fourth quarter after it completes its 2019 rate cut cycle to help infuse fresh liquidity into the market. RRR reductions will be put on hold as BSP gauges whether additional funds are diverted to productive activities and not simply parked at BSP’s overnight facilities,” Mapa said.
The Philippine Statistics Authority on Tuesday reported that inflation eased to a two-year low of 2.4 percent in July from 2.7 percent in June. The July inflation was also significantly slower than 5.7 percent a year ago. This brought the average inflation in the first seven months to 3.3 percent, within the government’s official target range of 2 percent to 4 percent for the year.
Diokno said that weaker global economic prospects continued to temper the inflation outlook. He said the potential adverse effects of a prolonged El Niño episode to inflation had subsided.
“The Monetary Board noted that prospects for global economic activity are likely to remain weak amid sustained trade tensions among major economies. Domestically, the outlook for growth continues to be firm on the back of a projected recovery in household spending and the accelerated implementation of the government’s infrastructure spending program, after the delay in expenditures due to the legislative impasse in the approval of the budget in January to April 2019,” he said.
Diokno said the benign inflation outlook provided room for a further reduction in the policy rate as a pre-emptive move against the risks associated with weakening global growth. Julito G. Rada
“Going forward, the BSP will continue to monitor price and output conditions to ensure that monetary policy remains appropriately supportive of sustained non-inflationary economic growth over the medium term,” Diokno said.
Deputy Governor Francisco Dakila, who succeeded Diwa Guinigundo, said the board revised downward the inflation forecasts for 2019 and 2020. For 2019, the forecast was reduced to 2.6 percent from the 2.7 percent made during the June 20 meeting. For 2020, the forecast was trimmed to 2.9 percent from 3 percent previously.
