IMF: BSP can cut interest rates further to shield economy from risks

The Bangko Sentral ng Pilipinas (BSP) has enough room to further cut interest rates and shield the domestic economy from mostly external risks, multilateral lender International Monetary Fund (IMF) said.

“The Philippines has policy space and could adopt a more expansionary macroeconomic policy stance should downside risks materialize. Under these adverse risk scenarios, fiscal stimulus should be prioritized toward public capital and social spending programs. The BSP also has substantial space to lower its policy rate if downside surprises materialize,” the IMF said in a Feb. 6 statement following its Article IV consultation with Philippine economic officials last month.

During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials.

On Thursday, the Monetary Board, the BSP’s policymaking body, reduced key rates by 25 basis points (bps), bringing the policy rate to 3.75 percent.

An earlier Inquirer report quoted BSP Governor Benjamin Diokno as saying that the latest interest rate reduction was a move “ahead, rather than behind the curve.”

In general, the Washington-based IMF was bullish about faster economic growth of 6.3 percent this year, “underpinned by government spending acceleration and the recent monetary policy easing.”

Last year, the BSP cut key rates by a cumulative 75 bps amid easing headline inflation, reversing the total of 175-bp rate hikes in 2018 when the rate of increase in prices of basic commodities hit a 10-year high.

The IMF projected inflation in 2020 to average 3 percent, within the government’s 2-4 percent target range.

With investments seen picking up given on-time budget implementation, the IMF sees the current-account deficit widening to 2.3 percent of gross domestic product (GDP) this year.

In 2019, GDP growth fell to an eight-year low of 5.9 percent mainly due to government underspending as a result of late budget approval.

For the IMF, risks to the Philippine economy were tilted to the downside, mostly coming from global trade tensions, shifting financial conditions worldwide, as well as natural disasters.

Since the IMF’s visit to the Philippines, a couple of developments emerged posing risks to economic growth, including the eruption of Taal Volcano in January and the outbreak of the novel coronavirus (2019-nCoV).

Diokno said the Monetary Board had said “the spread of the 2019-nCoV could have an adverse impact on economic activity and market sentiment in the coming months.”