BSP cuts rates for 1st time in over six years

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Thursday decided to reduce key policy rates, its first time to do so in over six years, with its inflation outlook "manageable" over the policy horizon.

BSP Governor Benjamin Diokno said the MB decided to cut rates by 25 basis points -- overnight borrowing to 4.5%, overnight lending to 5.0%, and the overnight deposit rate to 4.00%, effective Friday, May 10.

"The Monetary Board's decision is based on its assessment that the inflation outlook continues to be manageable, with easing price pressures owing to the decline in food prices amid improved supply conditions," Diokno told reporters at a press conference in Manila City.

This is the first policy rate cut in over six years or since the MB decided to cut key policy rates by 25 basis points in October 2012 to 3.50% for the overnight borrowing rate.

However, the BSP in June 2016 implemented the interest rate corridor (IRC), which entailed corresponding changes to the policy rates.

"Latest baseline forecasts indicate that inflation remains likely to settle within the target range of 3.0%  ± 1.0 percentage point for both 2019 and 2020, while inflation expectations have moderated further," explained Diokno.

According to the latest data from the Philippine Statistics Authority (PSA), inflation decelerated for the sixth consecutive month in April to mark the slowest pace of 3.0% in 16 months.

"In deciding on the stance of monetary policy, the Monetary Board noted the impact of the budget delays on near-term economic activity, but took the view that the prospects for domestic demand remain firm, to be supported by a projected recovery in household spending and the continued implementation of the government's infrastructure program," said Diokno.

"In addition, the Monetary Board observed that the global economic growth momentum has slowed down in 2019. Meanwhile, indications of slower growth in domestic liquidity and credit require careful monitoring," he elaborated.

Reserve requirement ratio

While the MB did not discuss a change in the reserve requirement ratio (RRR) -- the amount of cash a bank must hold in its reserves against deposits made by customers -- which currently at 18%, is said to be one of the highest in the world.

"It will be in the agenda next week. It's on the table, but we did not decide today. It will be discussed next week, no decision yet," said Diokno.

Diokno in March already hinted at the possibility of easing the RRR once every three months during the next four quarters.

Former BSP Governor Nestor Espenilla Jr. said he wanted to cut this by half during his term which was supposed to end in 2023, but he passed away in February after battling tongue cancer for more than a year.

Revised inflation outlook

In the same press conference, Deputy Governor Diwa Guinigundo said the MB now expects inflation to settle in at a slower rate of 2.9% this year from its initial forecast of 3.0%.

The central bank official attributed the change in the outlook to several reasons -- the lower monthly inflation for a number of months in 2019, and the decline in electricity rates for May, among others.

"Lower GDP was also considered to be a reason in the decline in inflation forecast, that would represent lower demand," he explained.

He noted, however, that inflation is now expected to accelerate further in 2020 to 3.1%, faster than the earlier forecast of 3.0%.

Guinigundo attributed the change in the outlook to two reasons -- the increase in the Dubai crude oil, as well as the increase in jeepney fares. — RSJ, GMA News