Tame inflation will hasten rate and reserve cuts, progrowth BSP chief says
Interest rates in the local financial system—already on a downtrend in recent months—may decline even faster over the short term if the central bank sees inflation easing further in the coming weeks, according to the country’s central bank chief.
Speaking to reporters late Friday, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said monetary authorities were already committed to relaxing monetary policy to help the Philippine economy grow faster, but added lower inflation in the coming months would be boosting this impetus.
“Even before the decision of the US Fed, we are already committed to cutting the level,” he said, when asked how the rate cut bias of the world’s largest central bank would influence local policy. “That’s an additional input to our decision.”
The BSP can boost liquidity in the local financial system—and thus help fuel economic activity—by cutting its short-term interest rates or reducing the reserve requirement ratio imposed on local banks.
Diokno said, however, he preferred first observing the effects of the current reserve requirement reduction program, being reduced by two percentage points from 18 percent to 16 percent over a 90-day period culminating at month’s end, before ordering further cuts.
“I repeat my original statement: [We will be] cutting interest rates first before the reserve requirement,” he added.
The central bank chief said policymakers were expected to formally adopt today, Monday, a full year inflation forecast of 2.7 percent —a level that, he said, would give authorities the leeway to deepen the slope of monetary easing.
Diokno said any such action could come in early August when the Monetary Board convened for its policy meeting.
“That will be the time when we have additional information on the inflation rate and the second quarter gross domestic product growth,” he said.
“With inflation slowing again in June, the BSP governor has sounded off on potential rate cuts in the near term, even hinting that the [overnight borrowing rate] cut will likely come before a further reduction in reserve requirements,” ING Bank Manila senior economist Nicholas Mapa said in an email to the media.
“With the last installment of the latest reserve requirement reduction scheduled for end of July, we expect the BSP to gauge the effect of this additional liquidity into the financial system before making additional adjustments on this front,” he added.
The BSP implemented a 25-basis point rate cut in early May as part of Diokno’s drive to feed the growing Philippine economy with more liquidity, but decided to pause last month after a surprise spike in that month’s inflation rate.
