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Philippines: Interest rates unchanged as inflation slows
MANILA, Philippines — As expected, the Bangko Sentral ng Pilipinas (BSP) decided anew yesterday to keep interest rates steady for the meantime as it recognized risks to economic growth due to the failure of Congress to pass the 2019 national budget.
In a press conference, BSP Governor Benjamin Diokno said the Monetary Board kept the overnight reverse repurchase rate at 4.75 percent, the overnight deposit rate at 4.25 percent and overnight lending rate at 5.25 percent.
Diokno said the decision to keep benchmark rates on hold for the third straight rate-setting meeting since December was due to the slowing down in inflation which is now expected to ease back to the central bank’s two to four percent target for both 2019 and 2020.
“The Monetary Board’s decision is based on its assessment that prevailing monetary policy settings remain appropriate,” Diokno said after presiding over the meeting as BSP governor and chairman of the Monetary Board.
Likewise, Diokno said monetary authorities also observed that overall prospects for domestic activity continue to be firmly supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure program.
“However, there are risks to economic growth in 2019 if the current budget impasse in Congress is not resolved soon,” he said.
According to Diokno, the Monetary Board also noted that the risks to inflation outlook remain broadly balanced for 2019 even as it observed that further risks could emerge from prolonged El Niño and higher-than-expected increases in global oil and food prices.
For next year, Diokno said 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.
“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,”
Easing inflation allowed the BSP to take a breather from its tightening cycle wherein it raised interest rates by 175 basis points in five straight rate-setting meetings from May to November last year to prevent inflation from spiralling out of control.
Inflation accelerated to 5.2 percent last year from 2.9 percent in 2017, exceeding the central bank’s two to four percent target, due to elevated oil and food prices as well as weak peso.
BSP Deputy Governor Diwa Guinigundo said the Monetary Board lowered its inflation forecast to three percent instead of 3.1 percent this year but kept next year’s projection at three percent.
He said the BSP expects that the downward trajectory of inflation would continue throughout 2019 and stabilize at around three percent in 2020.
Despite the BSP decision to keep the reserve requirement ratio at 18 percent, Guinigundo said the reduction of the RRR has always been on the table.
“Adjustments (on RRR and policy) need careful assessment before actually considering an actual adjustment,” Gunigundo said.
According to Guinigundo, a one percentage point reduction in RRR could release between P85 billion and P90 billion to the financial system.
Rate cuts are now becoming more likely after the BSP kept rates steady as expected, according to London-based Capital Economics.
The macroeconomy research institution said the worsening outlook for the economy and the expected weakening of exports on the back of sluggish global growth gives weight to this outlook.
“Bangko Sentral Pilipinas left its main policy rate on hold at 4.75 percent, but with inflation falling back sharply, interest rate cuts are now looking increasingly likely. We are expecting the first cut at the BSP’s next meeting in May,” Capital Economics said.
“Another reason we expect the central bank to cut interest rates is the worsening outlook for the economy,” it said. – With Czeriza Valencia
Source: https://www.philstar.com/business/2019/03/22/1903446/interest-rates-unchanged-inflation-slows#4eLj6FpZYmS1IjRF.99