BSP shuts valve pumping more cash into economy

The central bank on Thursday kept its key interest rates unchanged hewing closely to the pronouncement of Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno that monetary authorities were done with pumping more cash into the economy this year.

At its meeting on monetary policy, the Monetary Board decided to maintain the interest rate on the BSP’s overnight reverse repurchase facility at 4 percent. Interest rates on overnight deposit and lending facilities were kept unchanged at 3.5 percent and 4.5 percent.

The decision was buttressed by the central bank’s view that inflation had already bottomed out after being on a downtrend for most of 2019 and will start “normalizing” by 2020.

In a statement, the BSP said forecasts predict that inflation would remain in the 3 percent range, plus or minus 1 percentage point, for the rest of 2019 until 2021.

A rise in inflation was forecast in 2020 but was likely to fall again in 2021, it said.

But inflation in 2020 was not due to any price drivers but mainly to the impact of African swine fever on pork prices and instability of oil prices because of conflicts in the Middle East.

A weak global economy was likely to weigh down on economic activity and demand for goods, the BSP said.

Inflation projections based on the BSP’s survey of private economists also predict an inflation rate well within target.

ING Bank Manila senior economist Nicholas Mapa said that it was clear the “pro-growth” central bank chief decided to pause to weigh the impact of his rate cuts after quite a busy 2019.

Mapa, in an e-mail, said Diokno “has kept the mantra of data dependency” in guiding policy decisions.

Inflation is forecast to bounce from its recent reading of 0.8 percent in October as prices normalize and as meat, fish and chicken prices rise because of rising demand from a consumer base avoiding pork.

Growth was still expected to accelerate but several analysts expect it to fall short of the government target of 6-7 percent in 2019.

The BSP added that, despite gloomy skies in the global economy, firm private domestic spending and sustained progress in policy reforms would stand as buffer for global economic knives.

Diokno said the Monetary Board “believes that prevailing monetary policy settings remain appropriate.”

This assessment, he said, is backed by one of the slowest inflation rates in years and a solid outlook for domestic economic growth.

The shutoff of the cash valve, he said, would give previous monetary easing decisions, like a 75 basis point reduction in rates and a cut in bank reserve requirements, time to “work their way into the economy.”

He said the Monetary Board was also confident that the 2020 budget would be passed before 2019 ends.

“The BSP will continue to monitor emerging price and output conditions to ensure that monetary policy stance remains consistent with ensuring stable prices while supporting economic growth over the medium term,” Diokno said. Edited by TSB

Edited by TSB