BSP keeps cautious monetary policy stance despite easing inflation

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) kept its key interest rate unchanged on Thursday, with policy makers preferring to retain a cautious stance despite acknowledging that inflation pressures have eased in recent weeks.

In a press briefing after his first rate setting meeting, BSP Governor Benjamin Diokno said the Monetary Board’s decision to keep its overnight reverse repurchase facility unchanged at 4.75 percent was based on the assessment that “prevailing monetary policy settings remain appropriate.”

“Latest baseline inflation forecasts show inflation settling within the target range of 3 percent, plus or minus 1 percentage point for both 2019 and 2020, while inflation expectations continue to stabilize within the target band,” he said.

“Inflation pressures have eased further since the previous monetary policy meeting, reflecting mainly the decline in food prices amid improved supply conditions,” Diokno added.

The Monetary Board’s decision came as a surprise to some market watchers who had bet on some form of monetary easing — whether though an interest rate cut or a reduction in banks’ reserve requirement — given Diokno’s pro-economic growth bias.

Some analysts, however, continued to predict a central bank easing over the near term despite Thursday’s decision to keep rates steady.

“[We] continue to expect a reserve requirement ratio cut in the near term given that it remained omitted from the official policy statement at the March 21 meeting,” ING economist Nicholas Mapa said in a note to the press.

“With domestic liquidity growth at single digits and time deposit rates elevated, we foresee a reduction the reserve requirement ratio from 18 percent to 17 percent at an off cycle policy meeting in the next few weeks,” he said.

During the briefing, the BSP chief warned that “there are risks to economic growth in 2019 if the current budget impasse in Congress is not resolved soon.”

Despite this, the Monetary Board observed that overall prospects for domestic activity continue to be firm, supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure program, he explained.

“The Monetary Board also noted that the risks to the inflation outlook remained broadly balanced for 2019 even as it observed that further risks could emerge from prolonged EI Niño and higher-than-expected increases in global oil and food prices,” Diokno said.

“For 2020, the risks lean toward the downside as tighter global financial conditions and geopolitical risks temper global economic activity and potential upward pressures on commodity prices,” he added. “Given these considerations, the Monetary Board is of the view that the within-target inflation outlook and firm domestic growth support keeping monetary policy settings steady at this time.” /kga