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BSP cuts key interest rate anew

Low inflation prompts central bank to reduce policy rate by 25 bps, but warns of rising price risks
By: - Reporter / @daxinq
/ 05:30 AM September 27, 2019

As expected, the central bank on Thursday reduced by a quarter of a percentage point the interest rate on which financial institutions in the country priced their loans to clients, citing the low inflation rate regime prevailing in the domestic economy.

In a press briefing, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the 25-basis point cut in the regulator’s key overnight rate—the third cut of that magnitude this year —was due to the easing of consumer prices in recent months.

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“The Monetary Board’s decision is based on its assessment that price pressures have eased further since the previous meeting,” he said. “Latest baseline forecasts of the BSP continue to indicate that inflation is likely to settle within the lower half of the target band of 3 percent, plus or minus 1 percentage point for 2019 up to 2021.”

Starting Friday, BSP’s overnight reverse repurchase facility will be reduced to 4 percent, having been reduced by 25 basis points each in August and May of this year, in response to the inflation downtrend.

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The reduction was made possible by the easing of the August inflation rate to 1.7 percent — the lowest in almost three years — in response to policy adjustments made by the government in response to last year’s sharp spike in prices. These adjustments include the BSP’s own monetary tightening of a cumulative 175 basis points last year, and the Duterte administration’s decision to liberalize the importation of rice, one of the most price sensitive commodities in the inflation basket.

Speaking to the media Thursday afternoon, Diokno said inflation expectations “remain well-anchored within the inflation target range based on the BSP’s survey of private sector economists.”

He warned, however, that the Monetary Board now believes the balance of risks to the inflation outlook “have shifted toward the upside for 2020” before tilting once more to the downside for 2021.

“Upside risks to inflation over the near term emanate mainly from volatility in oil prices due to geopolitical tensions in the Middle East and from the potential impact of the African swine fever outbreak on food prices,” the central bank chief said. “Meanwhile, the subdued pace of global economic activity continues to temper the inflation outlook.

“At the same time, the Monetary Board believes that prospects for global economic growth are likely to remain weak owing mainly to uncertainty over trade policies,” he added. “Firm domestic spending and progress on policy reforms will serve as a buffer against global headwinds.”

Given these considerations, Diokno said the Monetary Board believed that the benign inflation outlook continued to offer room for a further reduction in the policy rate to support economic growth and reinforce market confidence.

“Going forward, the BSP will continue to monitor emerging price and output developments to ensure that monetary policy settings remain consistent with price stability while being supportive of sustained non-inflationary economic growth over the medium term,” he said.

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TAGS: Bangko Sentral ng Pilipinas, Benjamin Diokno, economy, inflation rate, interest rate
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