BSP finally gives in to rate cut calls amid weak GDP growth, slowing inflation

BSP Governor Benjamin Diokno. INQUIRER file photo / EARVIN PERIAS

MANILA, Philippines — The central bank on Thursday cut its key interest rates by 25 basis points and, thus, formally began unwinding the tight monetary policy regime it implemented last year to fight high inflation.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno – came into office last March vowing to bring down the cost of money – cited the recent declines in the inflation rate for the decision of the Monetary Board, which came on the same day the government announced a weaker-than-expected growth for the local economy in the first quarter.

The central bank’s first rate cut since its 175-basis point string of rate hikes in 2018 effectively brings down its key overnight borrowing rate, on which banks base their own lending rates, to 4.5 percent.

“The Monetary Board’s decision is based on its assessment that the inflation outlook continues to be manageable, with easing price pressures owing to the decline in food prices amid improved supply conditions,” Diokno said.

“Latest baseline forecasts indicate that inflation remains likely to settle within the target range of 3 percent, plus or minus 1 percentage point for both 2019 and 2020, while inflation expectations have moderated further,” he added.

Banks’ reserve requirement ratios, which is another important monetary policy tool, was kept unchanged at 18 percent. The central bank chief said the proposed reduction the amount of cash banks are required to keep in reserve was not discussed during Thursday’s Monetary Board meeting, but will be tabled in the agenda that will be discussion during next week’s regular meeting.

Diokno said that, in deciding on the stance of monetary policy, the Monetary Board noted the impact of the budget delays on near-term economic activity, but took the view that the prospects for domestic demand remain firm, to be supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure program.

The government said that growth in the first quarter of the year slowed to 5.6 percent – its slowest in four years – due to the delay in the passage of the 2019 national budget by the House of Representatives. Passed only in February, each day that the state operated under a reenacted budget resulted in the government being unable to spend P1 billion for infrastructure programs which, in turn, resulted in slower economic growth for the period.

“In addition, the Monetary Board observed that the global economic growth momentum has slowed down in 2019,” he said. “Meanwhile, indications of slower growth in domestic liquidity and credit require careful monitoring.”

Diokno noted that the risks to the inflation outlook remain broadly balanced for 2019 amid risks of a prolonged El Niño episode and higher-than-expected increases in global oil prices. For 2020, the risks continue to lean toward the downside as weaker global economic activity could temper commodity price pressures.

“Looking ahead, the BSP will continue to monitor developments affecting the inflation outlook to ensure that the monetary policy stance remains consistent with its price stability objective,” he said.