Another 25-basis point cut in BSP rates seen

The country’s inflation rate likely eased further to 2 percent this month, seen to give the Bangko Sentral ng Pilipinas (BSP) the leeway  to slash its key interest rates by 25 basis points in the next monetary policy setting on Sept. 26.

This is according to Union Bank chief economist Ruben Carlo Asuncion, who said August inflation was likely to cool further from 2.4 percent in July because of slower annual increases in the prices of rice and other food items.

“Lower fuel prices and electricity costs may have also contributed to the slowdown. Weather-related impact on prices may have been muted, though,” he said.

With the inflation rate coming from a high of 6.4 percent in August last year, Asuncion said consumer prices might had been largely influenced by lower rice prices, lower average pump prices for August and lower electricity cost. Specifically, he noted that Meralco’s electricity rates had gone down for the fourth straight month due to lower spot market prices.

“As rice prices were noted to have dropped in the last three months starting May, this (easing of inflation) has been traced to the rice tariffication law signed in February,” he said.

Signed by President Duterte into law on Feb. 14, 2019, the law amended the two-decade-old Agricultural Tariffication Act of 1996 and replaced the quantitative restrictions  on rice imports with tariff.  It liberalized the importation of rice, which had been a monopoly of the state-run National Food Authority for decades.

UnionBank’s economic research unit now sees this benign inflation trend as a huge window for the BSP to ease monetary policy further. Asuncion’s economic team expects the BSP to “continue its rate-cutting to the tune of 25 basis points on  Sept. 26.”

In a forum with the Economic Journalists Association of the Philippines on Wednesday, BSP Governor Benjamin Diokno had said he was open to another 25-basis point interest rate cut by the end of the year.

The BSP has so far slashed its overnight borrowing rate by a total of 50 basis points so far this year, the last 25-basis point of which was sanctioned earlier this month.

Diokno noted that “price pressures have continued to dissipate, while prospects for global economic activity are likely to remain weak amid sustained trade tensions among major economies.”

“Looking ahead, we expect inflation to remain on a target-consistent path for 2019 and 2020. The latest baseline forecasts indicate that inflation is projected to average 2.6 percent for 2019 and 2.9 percent for both 2020 and 2021,” Diokno said.