MANILA, Philippines – The central bank on Thursday declared victory in its war against inflation — which it had been waging for two years now — saying prices of consumer goods and services for next year and beyond will likely be “benign.”
This developed as Bangko Sentral ng Pilipinas Governor Benjamin Diokno announced that the Monetary Board decided to maintain the interest rate on the BSP’s overnight reverse repurchase facility at 4 percent during final meeting of the year.
Accordingly, the interest rates on the overnight deposit and lending facilities were kept unchanged at 3.5 percent and 4.5 percent, respectively.
“The Monetary Board’s decision is based on its assessment of a benign inflation environment,” the country’s chief inflation buster said in a press briefing. “Latest baseline forecasts indicate that the future inflation path remains within the target range of 3 percent, plus or minus 1 percentage point in 2020-2021, with well-anchored inflation expectations.”
Market expectations
At the same time, Diokno sought to manage the market’s expectations, saying that the balance of risks to the inflation outlook continue to lean slightly toward the upside in 2020, but toward the downside in 2021.
“Upside risks to inflation over the near term emanate mainly from potential volatility in international oil prices amid geopolitical tensions in the Middle East as well as from the potential impact of the African Swine Fever outbreak and recent weather disturbances on domestic food prices,” he said.
But this would be offset by prevailing uncertainties over trade policies in major economies which would continue to weigh down on global economic activity and demand and could thus mitigate upward pressures on commodity prices.
Economy robust
The central bank believes that, notwithstanding the weak global growth outlook, prospects for the Philippine economy continue to be robust on the back of firm domestic demand. Sustained policy support from increased fiscal spending, as well as improved domestic liquidity conditions owing to recent monetary adjustments, is also expected to support growth in the coming months.
“Given these considerations, the Monetary Board is of the view that the within-target inflation outlook and solid prospects for domestic growth support keeping monetary policy settings steady,” Diokno said. “Going forward, the BSP will continue to monitor developments affecting the inflation outlook and demand conditions to ensure that the monetary policy stance remains consistent with its price and financial stability objectives.”
Meanwhile, market watchers believes the central bank is pointed to reduce interest rates early next year to help spur economic growth which has underperformed this year, and will likely come in at the lower end of the government’s 6-6.5 percent forecast range.
“Given this outlook, we expect the BSP to cut its policy rate by 25 basis points as early as the February 2020 meeting and ease by a total of 50 basis points next year,” ING Manila senior economist Nicholas Mapa said in an emailed note to reporters.
Banks’ reserve reduction
He added that the central bank chief will likely bide his time with regard to further reductions in banks’ reserve requirement as he opts to gauge whether the deluge of liquidity released from previous cuts are actually feeding into the productive sectors of the economy.
“Given the central bank decision to pause, we maintain our call for further peso appreciation bias to end the year on seasonal flows from overseas Filipino migrants although the recent sell down in the local equity market could limit the peso’s gain,” Mapa said.
However, given the projected acceleration of the government’s infrastructure program, the economist expects the local currency to face renewed depreciation pressure in the coming months as the trade balance is forecast to widen further into deficit.