BSP ends policy-easing streak

The central bank on Thursday kept its key interest rates unchanged, hewing closely to the pronouncement of Bangko Sentral ng Pilipinas Governor Benjamin Diokno that monetary authorities were done with pumping the economy with liquidity this year.

At its meeting on monetary policy, the Monetary Board decided to maintain the interest rate on the BSP's overnight reverse repurchase facility at 4 percent. Accordingly, the interest rates on the overnight deposit and lending facilities were kept at 3.5 percent and 4.5 percent, respectively.

This decision was buttressed by the central bank’s view that inflation had already bottomed out after being on a downtrend for most of 2019 and would start “normalizing” by next year.

“Latest baseline forecasts of the BSP continue to indicate that inflation is likely to settle within the lower half of the target band of 3 percent, plus or minus 1 percentage point for 2019 up to 2021, with the balance of risks to the inflation outlook leaning toward the upside for 2020 and toward the downside for 2021,” the BSP said in a statement.

“Upside risks to inflation over the near term emanate mainly from the potential impact of the African Swine Fever outbreak on food prices and from potential volatility in oil prices amid geopolitical tensions in the Middle East,” it added.

At the same time, weak global economic prospects continued to temper the inflation outlook as uncertainty over trade policies weighed down on global economic activity and demand, according to the central bank.

Meanwhile, inflation expectations based on the BSP’s survey of private sector economists also remained well-anchored within the inflation target range.

ING Bank Manila senior economist Nicholas Mapa said that it was clear the “pro-growth” central bank chief decided to pause to weigh the impact of his rate cuts after quite a busy 2019.

“Governor Diokno, who had previously vowed to ‘normalize’ rates, has kept the mantra of ‘data dependency’ in guiding his policy decisions and we expect him to monitor inflation forecasts and the economy’s overall growth momentum going forward,” he said in an email to reporters.

Inflation is forecast to bounce from its recent reading of 0.8 percent in October as base effects wash out quickly and as meat, fish and chicken prices tick higher as consumers buy substitutes for pork items. Meanwhile, growth is expected to accelerate but several analysts expected it to fall short of the government’s growth target of 6-7 percent for this year.

The central bank added that, notwithstanding prospects on the global front, firm private domestic spending and sustained progress in policy reforms would serve as a buffer against external headwinds.

“Given these considerations, the Monetary Board believes that prevailing monetary policy settings remain appropriate,” Diokno said in a statement, adding that this assessment was supported by the benign inflation outlook and a firm outlook for domestic economic growth.

“At the same time, a prudent pause in monetary adjustments will enable the cumulative 75-basis-point reduction in policy rates as well as the cut in reserve requirement ratios to continue working their way through the economy,” he said. “The Monetary Board also trusts that the fiscal budget for 2020 will be passed within this year.”

“Going forward, the BSP will continue to monitor emerging price and output conditions to ensure that the monetary policy stance remains consistent with ensuring stable prices while supporting economic growth over the medium term,” Diokno said.