In a preemptive move, the Monetary Board yesterday decided to reduce the key rates of the Bangko Sentral by 25 basis points as prospects for the global economy show signs of weakness emanating from geopolitical tensions, trade imbalance and a virus epidemic.
Benjamin Diokno, Bangko Sentral ng Pilipinas, yesterday said the BSP’s overnight reverse repurchase (RRP) facility now stands at 3.75 percent.
The interest rates on the overnight lending and deposit facilities were reduced to 4.25 percent and 3.25 percent, respectively.
“The Monetary Board also observed prospects for global economic growth have weakened further amid geopolitical tensions. It noted the spread of the 2019 novel coronavirus could have an adverse impact on economic activity and market sentiment in the coming months,” Diokno said.
On the local front, Diokno said the latest baseline forecasts indicate a broadly steady path of inflation for 2020 and 2021, with average inflation remaining within the target range of between 2 and 4 percent.
“Inflation expectations also continue to be firmly anchored within the target over the policy horizon. Meanwhile, the risks to the inflation outlook continue to tilt slightly toward the upside in 2020 and toward the downside in 2021,” Diokno said.
He explained upside risks to inflation over the near term emanate mainly from potential upward pressures on food prices owing in part to the African swine fever outbreak late last year and tighter international supply of rice.
He also added that there continues to be the burden on the economy posed by the ongoing Taal volcano eruption and the aftermath of typhoon Tisoy.
But he noted that uncertainty over trade and economic policies in major economies continue to weigh down on global demand, thus mitigating upward pressures on commodity prices.
“Given these considerations, the Monetary Board concluded the manageable inflation environment allowed room for a preemptive reduction in the policy rate to support market confidence. While recent demand indicators still point to a firm outlook for the domestic economy, the Monetary Board believes a policy rate cut would provide additional policy support to ward off the potential spillovers associated with increased external headwinds,” Diokno said.
Diokno said the BSP will remain watchful “over emerging price and output conditions to ensure that monetary policy settings remain consistent with price stability while supporting sustained non-inflationary growth over the medium term.”
Francisco Dakila, BSP Deputy Governor, said the Monetary Board noted a slight increase in inflation forecast for this year. From 2.9 percent last December, BSP now sees inflation to average at 3 percent. For 2021, the BSP maintained its forecast of 2.9 percent.
Inflation grew faster in January to 2.9 percent, driven by price increases in the heavily-weighted food and non-alcoholic beverages index, the Philippine Statistics Authority on Wednesday said.
This is the highest inflation recorded since June 2019 when inflation was posted at 2.7 percent.
January’s figure is also higher than the 2.5 percent posted in December last year but much slower than the 4.4 percent figure for January last year.
Nicholas Antonio Mapa, Senior Economist of ING Bank, Diokno opted to carry out a preemptive rate cut citing the impending slowdown tagged to the now ongoing 2019-nCoV episode.
“(He) previously indicated that the virus outbreak could shave up to 0.3 percentage points to growth and the monetary easing was carried out with an eye to bolster growth momentum given the government’s higher growth aspiration of 6.5-7.5 percent GDP,” Mapa said.
Mapa, however, said that inflation is still expected to remain within target, giving the Monetary Board more room to ease.
“The still benign inflation outlook affords the central bank proper scope to continue easing monetary policy with Diokno primed to carry out a second rate cut sometime within the first half of the year. Diokno had previously telegraphed up to 50 basis points worth of policy easing in 2020 and we expect him to cut policy rates again, as early as the May meeting,” Mapa said.
He said the BSP “will likely shelve plans to adjust the reserve requirement (RR) given that recent cuts to the RR have not translated directly into bank lending activity.”
Meanwhile the Department of Finance (DOF) said the country’s inflation rate could slow down moving forward amid lower oil prices, while less demand for petroleum following the novel coronavirus outbreak will dampen inflationary pressures.
“The downtrend in crude oil prices starting January could slow down inflation going forward,” the DOF said.
“Lower global economic growth due to the coronavirus outbreak will also reduce petroleum demand and thus, dampen inflationary pressures,” it added.
The DOF also said food supply needs to be scaled up to reduce inflationary pressures.
“In a discussion with finance secretary Carlos Dominguez over the phone, secretary William Dar of the Department of Agriculture agreed to adopt measures to boost food supply especially now that the open season for fish has started,” the DOF said.
The National Economic and Development Authority earlier said the government remains vigilant as upside risks have emerged from several unexpected phenomena and despite a stable inflation outlook for 2020.
“Despite the relatively stable inflation outlook, we cannot be complacent, as the balance of risks remains on the upside for 2020 due to the effects of the Taal Volcano eruption, spread of African Swine Fever, and novel coronavirus,” said Ernesto Pernia, socioeconomic planning secretary.
