The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday reduced the overnight borrowing rate by 25 basis points to 4.5 percent, the first time in more than six years, after inflation rate eased to the target range and economic growth decelerated to a four-year low.
Bangko Sentral Governor Benjamin Diokno said the interest rates on the overnight lending and deposit facilities were also reduced accordingly.
“The Monetary Board’s decision is based on its assessment that the inflation outlook continues to be manageable, with easing price pressures owing to the decline in food prices amid improved supply conditions,” Diokno said.
He said the latest baseline forecasts indicated that inflation would likely settle within the target range of 2 percent to 4 percent for both 2019 and 2020, while inflation expectations moderated further.
The last time the board cut the policy interest rate was on Oct. 25, 2012, when it reduced the key policy interest rates by 25 basis points to 3.5 percent.
Diokno said in deciding on the stance of monetary policy, the Monetary Board noted the impact of the budget delays on near-term economic activity but took the view that the prospects for domestic demand remain firm supported by a projected recovery in household spending and the implementation of the government’s infrastructure program.
“In addition, the Monetary Board observed that the global economic growth momentum has slowed down in 2019. Meanwhile, indications of slower growth in domestic liquidity and credit require careful monitoring,” Diokno said.
The Philippine Statistics Authority reported earlier that inflation rate slowed to 3 percent in April from 3.3 percent in March. The Monetary Board said the risks to the inflation outlook remained broadly balanced for 2019.
The board slightly reduced the inflation forecast for 2019 to 2.9 percent from 3 percent made during the previous meeting, while the forecast for 2020 was slightly raised to 3.1 percent from 3 percent.
BSP Deputy Governor Diwa Guinigundo said the board also took note of the lower monthly inflation for the past few months and the slower GDP growth. GDP growth in the first quarter slowed to 5.6 percent from 6.5 percent a year ago, following the delayed approval of the 2019 government budget.
“We also considered the slower world GDP growth [which could result in slower demand], and the decrease in Meralco rates in May 2019,” Guinigundo said.
Guinigundo said the board considered the increase in Dubai crude oil and the adjustments in jeepney fares. When asked if the BSP would consider cutting the interest rates further in the coming months, Diokno said the Monetary Board would continue to be “data dependent,” taking into account the vital data both domestically and globally.
Diokno said the reserve requirement issue was not discussed by the board Thursday, but “it will be in the agenda of the board next week.”
Guinigundo said the downward trajectory of inflation prompted monetary authorities to normalize the policy stance.
Standard Chartered economist for Asia Chidu Narayanan said the sluggish first-quarter GDP growth of 5.6 percent combined with inflation continuing to drop further supported the British bank’s view of rate cuts from BSP.
“We see a total of 100 bps of rate cuts from BSP this year, taking the policy rate to 3.75 percent year on year. In addition, we expect 200bps of RRR cuts in addition to 100bps of policy rate cuts this year,” Narayanan said.
Narayanan said the rising real interest rates and tightening monetary conditions weighed on credit growth, which impacted private investment.
The BSP had increased by a total of 175 basis points the policy rates last year to curb the rising consumer prices. However, it reduced the reserve requirements by 2 percent to 18 percent.
Inflation in April eased to a 16-month low of 3 percent from 3.3 percent in March on more stable food prices, bringing the first four months average to 3.6 percent, within the target range of 2 percent to 4 percent.
Inflation peaked at a nine-year high of 6.7 percent in September and October 2018, on higher prices of rice and other food commodities.