BSP seen slashing interest rates as inflation threat abates

The central bank will likely resume its monetary easing drive —paused due to an unexpected rise in May—after the inflation rate resumed its downward trek last month, declining to its lowest level in almost two years.

In a statement, Bangko Sentral ng Pilipinas Governor Benjamin Diokno described June’s consumer price index of 2.7 percent as being “consistent” with the monetary authority’s  prevailing assessment that inflation would “firmly settle” within the target range of 3 percent, plus or minus 1 percentage point for 2019 and 2020.

The BSP chief earlier said there was “a lot of room” for injecting more liquidity into the financial system to feed Philippine economic growth, especially with domestic inflation falling and other central banks around the world easing their monetary policies.

“The BSP will keep close watch over latest economic developments to ensure that the monetary policy stance remains consistent with the BSP’s price stability objective while being supportive of economic growth,” Diokno said.

The BSP had expected June inflation to come in between 2.2 to 3 percent, after an increase to 3.2 percent in May.

On Friday, the government announced that the inflation rate in June declined to 2.7 percent due to the a confluence of so-called base effects, the implementation of free tuition at state universities and colleges, and lower rice prices.

According to the Philippine Statistics Authority, last month’s headline inflation rate was the lowest since the 2.6 percent in August 2017.

“Diokno has sounded off on the possibility of more policy rate cuts within the year and the slower inflation print should afford them proper scope to ease monetary policy further,” ING Manila senior economist Nicholas Mapa said in a statement.

“With inflation well-within target, the BSP will likely look to tap on the accelerator once more after having slammed hard on the brakes in the previous year,” he said, adding that the local unit of the Dutch financial giant was betting on an interest rate cut by the BSP at its August Monetary Board meeting should inflation continue to show it would remain within target and with second quarter growth projected to be “soft.”

Mapa said the June price report helped year-to-date inflation settle at 3.4 percent and “remains another indication that inflation remains well behaved enough,” and with BSP’s 2019 forecast of 2.7 percent inflation now “looking more probable.”

“Almost all subsectors showed slower inflation in June compared to the previous month as base effects also kicked in,” he said, adding that core inflation also declined to  3.3 percent from the previous month’s 3.5 percent gain, “signaling that pervasive price pressures have begun to abate.”