As inflation is likely to settle within the government’s target for this year, the Monetary Board yesterday decided to maintain the key rates of the Bangko Sentral ng Pilipinas (BSP).
Francisco Dakila Jr., BSP deputy governor, said the BSP’s overnight reverse repurchase (RRP) facility remains at 4 percent.
The interest rates on the overnight deposit and lending facilities were accordingly held unchanged at 3.5 percent and 4.5 percent, respectively.
“Latest baseline forecasts of the BSP continue to indicate that inflation is likely to settle within the lower half of the target range of between 2 and 4 percent with the balance of risks to the inflation outlook leaning toward the upside for 2020 and toward the downside for 2021,” Dakila said.
For 2019, the Monetary Board lowered the full-year inflation forecast to 2.4 from 2.5 percent.
For the next two years, the forecast is pegged at 2.9 percent.
Inflation continued to ease in October registering 0.8 percent, from 0.9 percent the previous month, as the heavily-weighted food and non-alcoholic index continue to drop.
The Philippines Statistics Authority said this is the fifth consecutive month that inflation has slowed down this year.
October’s figure is also the slowest since May 2016.
But Dakila stressed that inflation is “likely to have bottomed out in October and it will start moving close to mid-point of the target by 2020 and 2021 as base effects starts to dissipate.”
“Again, this trend will be helped by several factors including the tapering off of the impact of the rice tariffication on inflation (and) the acceleration of domestic growth,” Dakila said.
Other 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.
At the same time, weak global economic prospects continue to temper the inflation outlook, as uncertainty over trade policies weigh down on global economic activity and demand.
Meanwhile, Dakila said inflation expectations based on the BSP’s survey of private sector economists also remain well-anchored within the inflation target range.
“Notwithstanding prospects in the global front, firm private domestic spending and sustained progress in policy reforms will serve as a buffer against external headwinds. Given these considerations, the Monetary Board believes that prevailing monetary policy settings remain appropriate,” Dakila said.
“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 added.
Nicholas Mapa, ING Bank senior economist, said the Monetary Board is “waiting for the dust to settle” and the move is “appropriate for now.”
“After quite a busy 2019, the ‘pro-growth’ Governor (Benjamin Diokno) decided it was time to weigh the impact of his recent accommodative moves to close out the year. 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,” Mapa said.
But given a possible miss on the growth objective, Mapa said they expect Diokno to come out swinging in 2020 with up to 50 basis points worth of policy rate cuts to help bolster growth momentum.
“Next year, the government will be chasing a higher growth target of 6.5-7.5 percent and BSP may likely need to shore up the fiscal stimulus while inflation dynamics allow them to do so. We also expect BSP to resume carry out its phased and pre-announced reductions to the reserve requirement ratio (RRR) in 2020 as Diokno looks to align the Philippines’ RRR with regional peers,” Mapa said.