By Mark T. Amoguis
Senior Researcher

THE CENTRAL BANK’s policy-setting body on Thursday cut benchmark interest rates by a quarter percentage point, as well as the inflation forecast this year and next, hours after the Philippine Statistics Authority (PSA) reported that the economy grew at the weakest pace in four years in the second quarter and two days after the PSA said that July inflation was the slowest in two-and-a-half years.

At its fifth policy review for the year on Thursday, the Monetary Board cut the key policy rates by 25 basis points, bringing the overnight reverse repurchase rate to 4.25%, and the overnight deposit and lending rates to 3.75% and 4.75%, respectively.

This followed a “prudent pause” in June as well as a 25 bp cut last May that partially dialed back a cumulative 175-bp hike implemented through five meetings last year in order to arrest rising inflation that peaked at a nine-year-high 6.7% in September and October.

The magnitude of rate cut matched the expectation of all 16 analysts asked by BusinessWorld late last week.

BSP Governor Benjamin E. Diokno said on Thursday that the MB based its latest policy decision on its assessment that price pressures have continued to ease since the previous meeting in June, as “inflation remains likely to settle within the inflation target of [2-4%] for 2019 up to 2021.”

“Moreover, the risks to the inflation outlook continue to be seen as broadly balanced for 2019 and 2020, while they are seen to tilt to the downside for 2021. Weaker global economic prospects continue to temper the inflation outlook. The potential adverse effects of a prolonged El Niño episode to inflation have subsided,” Mr. Diokno said.

The BSP chief was earlier quoted by Bloomberg on Aug. 5 as saying that he expected a 50-bp cut for the rest of the year.

BSP’s action follows those of its peers in New Zealand, India and Thailand which cut policy lending rates on Wednesday amid growing fears that the US-China trade war could aggravate a slowdown in the global economy.

“Prospects for global economic activity are likely to remain weak amid sustained trade tensions among major economies,” Mr. Diokno said.

At the same time, he added, “[d]omestically, the outlook for growth continues to be firm on the back of a projected recovery in household spending and the accelerated implementation of the government’s infrastructure spending program, after the delay in expenditures due to the legislative impasse in the approval of the budget in January-April 2019.”

“On balance, therefore, the Monetary Board believes that the benign inflation outlook provides room for a further reduction in the policy rate as a preemptive move against the risks associated with weakening global growth.”

INFLATION FORECAST REVISED LOWER
In the same briefing on Thursday, BSP Deputy Governor Francisco G. Dakila, Jr. said that the MB decided to cut 2019 inflation forecast to 2.6% from already-downward-revised 2.7% that was adopted in its June 20 review, while it slashed next year’s forecast to 2.9% from three percent previously.

It also gave its first forecast for 2021: 2.9% with a tilt “somewhat to the downside” due to prospects of slowing global growth.

The Development Budget Coordination Committee, a multiagency body that sets key state economic assumptions and fiscal programs for the medium term, in its July meeting expected inflation within the range of 2.7-3.5% (from 3-4% previously) this year, while it maintained 2-4% projection for next year until 2022.

“We are seeing a continuing relaxation of constraints on food prices: in particular, the impact of tariffication on rice,” Mr. Dakila said, referring to the law that liberalized importation of the staple that, in turn, brought down its prices.

Rice accounts for 9.59% of the theoretical basket of goods used by a typical household that is the basis for computing year-on-year overall price changes

Assumption for average Dubai oil price was also revised downward to $63.88 per barrel from $64.56/bbl previously. For next year, the commodity is seen to average even lower at $60.39/bbl from $61.35/bbl.

Banks’ reserve requirement ratio was left untouched and was not discussed during the meeting, Mr. Dakila said, adding that “the focus [of the meeting] was on what to do with the policy rate.”

The last tranche of the BSP’s 200-bp multi-phased reduction of banks’ reserve requirement ratio was implemented last July 26, taking it to 16% for big banks and to six percent for thrift banks.

“As of now, the liquidity released from the reserve requirements have found their way mostly to the facilities of the BSP and the… GS (government securities). We have yet to see the bulk of the liquidity going into bank lending and the economy. The decision on when to resume the reduction in the reserve requirement is a live discussion at the board,” Mr. Dakila said.

BSP’s Department of Economic Research Director Dennis D. Lapid said: “We continue to monitor what would be effects on the domestic liquidity conditions. It doesn’t show up yet in the bank lending and M3 data as of June…”

“The growth target this year is still achievable but closer to the lower end of the target,” Mr. Dakila said, referring to the disappointing 5.5% gross domestic product growth recorded in the second quarter from 5.6% in the preceding three months, and against the government’s 6-7% target for this year.

ANALYSTS WEIGH IN
“With growth reeling from the budget delay and elevated borrowing costs, BSP decided to hit the accelerator and cut rates by 25 bps to hopefully close the year on a high note. BSP continued to walk back last year’s ultra-aggressive rate hike to give the economy another shot in the arm to help chase the government’s 6-7 percent growth target,” ING senior economist Nicholas Antonio T. Mapa said in an e-mail to reporters.

“We expect the BSP to cut policy rates again by 25 bps at the September meeting given previous comments from Governor Diokno pointing to a total of 50 bps worth of rate cuts before the end of the year. Furthermore, we expect the BSP reduce reserve requirements (RRR) further in the 4Q after it completes its 2019 rate cut cycle to help infuse fresh liquidity into the market,” he added.

“RRR reductions will be put on hold as BSP gauges whether additional funds are diverted to productive activities and not simply parked at BSP’s overnight facilities. With BSP’s recent string of easing and government spending back online in 2H, the Philippines will look to finish the year strong with growth fueled by all sectors of the economy to get growth above 6% by yearend.”

Separately, Security Bank Corp.’s chief economist, Robert Dan J. Roces, said in an e-mailed note: “The worst may be behind the Philippine economy coming into the second half.”

“Yet, stronger external headwinds such as the protracted US-China trade war, the resulting downside risks to investments, and inflation set to fall further, gives scope for another 25 bps cut by year end to support and sustain growth coming into 2020,” Mr. Roces said.

“Thus, we expect full year GDP growth to be at or slightly above six percent. A data-dependent BSP will definitely take stock of its pro-growth stance and consider augmenting with an RRR cut sooner.”

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