BSP seen to cut rate soon
A benign inflation environment —with prices last month having risen at their slowest pace in almost three years, thanks to a large degree to the Rice Tariffication Law—may prompt the central bank to implement another round of monetary easing as soon as this month.
Speaking to reporters Friday morning, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the 25-basis-point reduction in the regulator’s key overnight borrowing rate that he promised would be implemented before yearend might happen at the next policy meeting of the Monetary Board in less than two weeks.
“Prospects are bright that it might come sooner rather than later,” he said. “It won’t reach November or December so it could be sooner.”
So far, the central bank has reduced its overnight borrowing rate by a total of 50 basis points over two policy meetings since May as the inflation rate continued to soften. This closely watched barometer now stands at 4.25 percent. This rate influences how much banks charge their own corporate and retail customers for loans.
Diokno added that another reduction in banks’ reserve requirement ratio could come this month or next. The reserve requirement—a portion of banks’ cash that regulators require to be kept in reserve in their vaults —currently stands at 16 percent. The central bank chief wants to reduce this to single-digit levels before the end of his term in 2023 in the hopes of putting the liquidity to more productive use.
The Philippine economy grew 5.5 percent in the second quarter, which was the slowest pace since 2015, but inflation also declined to 1.7 in August—its lowest since 2016.
According to ING Bank Manila’s senior economist Nicholas Mapa, the central bank would likely cut interest rates later this month and implement a 100-basis point reduction in the reserve requirement in two stages by October and November.
“As BSP moves quickly to unwind 2018’s rate hike barrage to save 2019 growth, we expect price conditions to remain favorable despite the successive policy-easing moves given that the 2018 inflation pop episode was cost driven in nature,” he said in a note to the press.
“Dialing back elevated policy rates will go a long way to restoring the investment-driven growth momentum of yesteryear as capital formation proved to be the biggest drag on growth in the second quarter,” he added.
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