BSP doesn’t disappoint seers, cuts interest rate anew

“Ahead, rather than behind the curve.”

Thus said Bangko Sentral ng Pilipinas Governor Benjamin Diokno in a text message to the Inquirer on Thursday (Feb. 6) after the policy-making Monetary Board decided to cut interest rate by a quarter of a percentage point.

While the rate cut was widely expected by financial markets, the central bank’s reason for doing it signaled a major shift in the way the regulator — previously influenced mainly by lagging economic data — would decide on monetary policy as the days pass.

“The Monetary Board concluded that the manageable inflation environment allowed room for a preemptive reduction in the policy rate to support market confidence,” Diokno said at a press briefing announcing the Monetary Board’s decision to cut interest rate on the BSP’s overnight reverse repurchase facility by 25 basis points to 3.75 percent.

The interest rates on overnight lending and deposit facilities were reduced to 4.25 percent for overnight lending and 3.25 percent for deposit facilities.

“While recent demand indicators still point to a firm outlook for the domestic economy, the Monetary Board believes that a policy rate cut would provide additional policy support to ward off the potential spillovers associated with increased external headwinds,” Diokno said.

In justifying the preemptive rate cut, the central bank chief said prospects for global economic growth have weakened further amid geopolitical tensions. He also noted that the spread of the deadly novel coronavirus could have an adverse impact on economic activity and market sentiment in the coming months.

Latest baseline forecasts indicate a broadly steady path of inflation for 2020 and 2021, with average inflation remaining within the target range of 3 percent, plus or minus 1 percentage point. Inflation expectations also continue to be firmly anchored within the target.

“Meanwhile, the risks to the inflation outlook continue to tilt slightly toward the upside in 2020 and toward the downside in 2021,” Diokno said.

“Upside risks to inflation over the near term emanate mainly from potential upward pressures on food prices owing in part to the African Swine Fever outbreak and tighter international supply of rice,” he said.

The central bank also believes that the continuing unrest of Taal Volcano, though feebler now, continued to present a challenge to the economy.

The impact of Typhoon Tisoy, one of the strongest to land in the Philippines, is also being measured.

Uncertainty in trade and economic policies globally continue to weigh down on demand which could be the counterforce to upward pressure on inflation.

Edited by TSB