BSP rate cut likely due to low inflation
As inflation fell to a 40-month low of 0.9 percent year-on-year in September, there is more room for the Bangko Sentral ng Pilipinas (BSP) to further cut interest rates, London-based Capital Economics said.
“The big drop in inflation in the Philippines last month means another rate cut before the end of the year is looking increasingly likely,” Capital Economics senior Asia economist Gareth Leather said in an Oct. 4 report titled “Inflation in Philippines opens door to more easing.”
The deceleration in headline inflation last September was mainly attributed by the government to the continuous rice deflation since it liberalized importation of the Filipino staple food starting March.
Rice prices dropped 8.9 percent year-on-year last month, the largest decline since 1995, according to the Philippine Statistics Authority (PSA).
“So far this year, the central bank in the Philippines has cut rates by 75 basis points (bps). Earlier in the week, [BSP] Governor (Benjamin E.) Diokno said that further easing would depend on what happens to inflation,” Capital Economics noted.
“Given our view that the headline rate will nudge down again in October and remain below the midpoint of the central bank’s 2 to 4 percent target for the next 12 months, further easing seems likely. We are sticking with our view that the BSP will cut rates two more times this cycle,” Capital Economics said.
From January to September, the rate of increase in prices of basic commodities averaged 2.8 percent, within the government’s target range.
Before September ended, the BSP’s policy-making Monetary Board not only cut the policy rate by 25 bps to 4 percent but also announced that banks’ reserve requirement ratio (RRR) will be reduced by another 100 bps—a follow-through to the earlier 200-bp reduction.
The BSP had also brought down its 2019 inflation forecast to 2.5 percent from 2.6 percent previously.
Last year, the BSP raised the policy rate by a total of 175 bps to 4.75 percent as the inflation rate hit a 10-year high of 5.2 percent amid higher excise taxes slapped on consumption under the Tax Reform for Acceleration and Inclusion Act, skyrocketing global oil prices, and domestic food supply bottlenecks, especially of rice.
