BANGKO Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said yesterday there will be another 25 basis points (bps) cut in the benchmark policy rates by the end of the year, completing a 75 bps interest rates reduction for 2019.
Diokno said he could not say as yet which would come first, the policy rate cut or the reduction in banks’ reserve requirement ratio (RRR). He reiterated that both actions are “live issues” and could come at any time.
“There’s another 25 bps (before the end of the year),” Diokno told a forum organized by the Economic Journalists Association of the Philippines on Tuesday. He cited the global monetary easing actions and continued benign inflation as factors for the impending cut.
Diokno said they will again reduce the RRR this year, on top of the 200 bps RRR cut they implemented in tranches in May, June and July. He however said that it may not be as much as another 200 bps cut, equivalent to P190 billion in fresh liquidity.
“We have another RRR cut this year but maybe not 200 bps (it could be) 150 bps,” said Diokno. When asked if like before, the policy cut will happen prior the RRR cut, he said – “we don’t know yet (because) it’s a live issue. It could be before the late September (Monetary Board) policy meeting. It could be after … we will just look at the data.”
The Monetary Board’s next monetary policy meeting is September 26. It will have two more after, on November 26 and December 12, for a total of eight policy meetings for 2019.
“As we are all aware, the specter of slowing global economic growth looms larger than ever on the horizon as protectionist policies and geopolitical tensions continue to dominate the global growth narrative,” Diokno told forum participants. “Greater global economic uncertainty may lead to higher risk aversion as international investors turn to safe-haven assets, resulting in volatility in our domestic financial markets. When this happens, this could have adverse consequences on our price and financial stability objectives, and ultimately on the country’s growth momentum.”
Since global growth risks may “further escalate” because of the US-China trade conflict, Diokno said that in response, “central banks around the world, including the Philippines, have responded by easing their respective policy rates to stimulate their domestic economies. In fact, some central banks have surprised the markets by reducing their rates by more than what was expected. This indicates that the global monetary policy easing cycle could gather momentum and last longer and deeper than previously anticipated.”
The BSP policy rate was reduced by 25 bps last May 9 and by another 25 bps last August 8 for a total of 50 bps. During its last policy meeting, the BSP further slashed its inflation forecast for 2019 to 2.6 percent from 2.7 percent, while the 2020 and 2021 estimate was 2.9 percent, still within the two-four percent government inflation target.
Diokno has said that third quarter inflation average will drop below two percent due to base effects. He is also hoping that the last quarter’s inflation average could be “much lower” than what their flow charts show because of lower global oil prices
Inflation rate averaged at 3.8 percent in the first quarter 2019 before falling to three percent in the second quarter. With the latest July inflation of 2.4 percent, the year-to-date inflation averaged at 3.3 percent.
Diokno said the decision to reduce interest rates last May 9 came from its assessment that price pressures have continued to ease and that inflation expectations have also moderated further.
The main factors that contributed to the BSP’s benign inflation outlook and the revision of the forecasts came from the continuing relaxation of food price pressures.
Last year, the BSP raised interest rates by 175 bps to curb high inflation at the time, because of higher oil and rice prices. Inflation peaked at 6.7 percent in September and October.
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