BSP lowers ’19 inflation forecast again

The central bank on Wednesday lowered its inflation forecast for the year another notch, further raising expectations that it would cut interest rates again to help boost economic growth when the policy-making Monetary Board convenes on Thursday.

“Based on Bangko Sentral ng Pilipinas’ (BSP) latest projection, inflation is expected to average at 2.5 percent for 2019,” BSP Governor Benjamin Diokno said in a note to reporters. “[This is] lower relative to the previous forecast of 2.6 percent as of Aug. 8, 2019.”

The revised forecast is also substantially lower than the government’s official target range for the year of 3 percent, plus or minus 1 percent.

In a speech delivered to financial executives the previous day, Diokno noted that inflation continued on its downtrend path, giving regulators enough elbow room to unwind the series of rate hikes implemented last year to fight a spike in consumer prices.

At its meeting today, most market watchers expect the Monetary Board to cut the central bank’s key overnight borrowing rate by another 25 basis points following the announcement by the government earlier this month that August inflation had fallen to 1.7 percent, the lowest in almost three years.

Diokno had promised another quarter of a percentage point interest rate cut before the end of the year to help offset the lackluster economic growth in the first semester, but later added that the cut might come as soon as this month.

He also committed to reduce banks’ reserve requirements to single digits from the current level of 16 percent before the end of his term in 2023.

The BSP wants to reduce interest rates to boost the amount of cash circulating in the economy and help the Philippines recover its growth pace after a lackluster first-half performance, which policymakers attribute to the delay in the passage of the 2019 national budget.

The rate cut—if it is implemented on Thursday—will help fiscal authorities implement their catch-up spending program, as it will make the cost of funds lower for both the public and private sectors. This could, in turn, help fuel the Duterte administration’s P9-trillion infrastructure buildup program.