BSP seen unlocking more liquidity with new rate cut despite January inflation hike
Market watchers expect the central bank to push through with an interest rate cut when the policy making Monetary Board convenes on Feb. 6, despite the government’s announcement of an uptick in the inflation rate for January.
In fact, Bangko Sentral ng Pilipinas Governor Benjamin Diokno pointed out on Wednesday morningthat the January inflation rate of 2.9 percent “was within the BSP’s forecast range of 2.5 – 3.3percent.”
“This is consistent with the BSP’s prevailing assessment that inflation is expected to gradually approach the midpoint of the target range in 2020 and 2021,” he said in a tweet.
He added that the central bank will consider all the latest developments in the Monetary Board’s assessment of domestic and external conditions in its meeting on Thursday.
As this developed, economists and market watchers said the central bank will likely proceed with a 25-basis point reduction in its overnight borrowing rate — which banks use as a basis for pricing their own loans — in an effort to help the Philippine economy return to above-6-percent growth levels.
“Despite the uptick in inflation, we expect the BSP to cut policy rates by 25 basis points at the Feb. 6meeting with [its] 2020 inflation forecast pegged at 2.9,” ING Manila senior economist Nicholas Mapa said in an email.
“Given the backdrop for slowing global growth, upside risks to the inflation outlook are dampened considerably with crude oil prices tanking on expectations for weaker global growth and depressed oil demand from China,” he added.
The official of the Dutch banking giant’s local unit said that, with inflation still expected to remain within target and as global growth is likely to be hampered by the spillover effects from the recent Wuhan coronavirus episode, he expects the central bank to resume unwinding its previous policy tightening to bolster growth momentum and chase the 6.5-7.5 percent growth target.
This was echoed by Bank of the Philippine Islands chief economist Jun Neri who said the Monetary Board would likely reduce interest rates on Thursday despite the January inflation uptick.
“With inflation still below 3 percent, the BSP may cut its policy rate by 25 basis points in its February policy meeting,” he said, pointing to the central bank chief’s recent statement that a 50-basis point cut is still on the table given the likelihood of inflation not exceeding target this year.
“However, a follow through cut may be more challenging given the upside risks to inflation emanating from the possibility of higher rice prices and the implementation of excise taxes,” he said.
Neri noted that peso depreciation pressures from portfolio outflows, lower tourism receipts, and potential slowdown in remittances may also prevent the BSP from cutting its key rate all the way down to 3 percent.
“As we have said before, the risk of significant portfolio outflow is high when inflation is above the policy rate,” Neri said.
Edited by TSB
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