BSP makes ‘preemptive’ rate cut to protect economy

“Ahead, rather than behind the curve.” Thus said Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno in a text message to the Inquirer on Thursday afternoon after the policy making Monetary Board decided to cut its interest rate by a quarter of a percentage point.

While the rate cut was widely expected by financial markets, the central bank’s stated 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 going forward.

“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 briefing, announcing the Monetary Board’s decision to cut the interest rate on the BSP’s overnight reverse repurchase facility by 25 basis points to 3.75 percent.

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

“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,” he said.

In justifying the preemptive rate cut, the central bank chief said prospects for global economic growth have weakened further amid geopolitical tensions, while noting that the spread of the 2019 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 over the policy horizon.

“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.” The central bank also believes that there continues to be the burden on the economy posed by the ongoing Taal volcano eruption and the aftermath of Typhoon “Tisoy,” while uncertainty over trade and economic policies in major economies continue to weigh down on global demand, thus mitigating upward pressures on commodity prices.

“Going forward, the BSP will remain watchful over emerging price and output conditions to ensure that monetary policy settings remain consistent with price stability while supporting sustained non-inflationary growth over the medium term,” Diokno said.