Amid easing inflation, BSP cuts key interest rate

The central bank yesterday reduced its key interest rate by a quarter of a percentage point—as expected by market watchers—resisting pressures to implement deeper cuts in the wake of disappointing second quarter economic growth figures announced by the government earlier in the day.

In a briefing, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the Monetary Board had decided to cut the interest rate on the BSP’s overnight reverse repurchase facility by 25 basis points to 4.25 percent “based on the 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 of 3 percent, plus or minus 1 percentage point for 2019 up to 2021,” he said, adding that inflation expectations “have also moderated further to levels consistent with the inflation target based on the BSP’s survey of private sector economists.”

Today’s decision marks the second rate cut implemented by the central bank this year after a similar 25-basis point reduction in interest rates in May. The monetary authority also recently concluded a 2-percentage point cut in banks’ reserve requirements staggered over a three-month period in an effort to buttress the country’s flagging economic growth with fresh cash.

The Philippine economy grew by only 5.5 percent in the second quarter, slowing further from the already disappointing pace of 5.6 percent recorded in the first three months of 2019. Authorities attributed the slowdown to the delayed passage of this year’s national budget with constrained public spending — a phenomenon that the central bank hopes to help counteract with looser monetary policy.

Diokno added that Thursday’s rate cut decision was supported by the assessment that 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.”

“Weaker global economic prospects continue to temper the inflation outlook,” he said in a press briefing. “The potential adverse effects of a prolonged El Niño episode to inflation have subsided.”

The Monetary Board also noted that prospects for global economic activity were 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.

The central bank chief explained that the benign inflation outlook provided room for further reduction in the policy rate as a preemptive move against the risks associated with weakening global growth.