New BSP governor sees opportunity for easing policy, RRR

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said there is leeway to cut interest rates with a declining inflation average but when to cut will be a timing issue.

It is the same with the reduction of banks’ reserve requirement ratio (RRR) which at 18 percent is the highest in the world.

“There is an opportunity for us to do some cuts but it would be based on data, evidence and the situation,” said Diokno.

“Timing is important (and) if the cut is the right thing to do … then we will do it,” he added.

Diokno, an economist, said however that “two data points do not constitute a trend” and that they “need to be more careful.” “We have to look at the situation globally. Is the global economy really slowing down? Are inflation expectations already down or something? We need to decide on that basis.”

On Wednesday, during his last “Breakfast with Ben” briefing, the new BSP chief said he wants to expedite the RRR reduction to remove intermediation costs. He said though, that he has not yet taken the oath of office when he made the statement.

He is saying now that “their policy will be determined by clear analysis (and) it should always be data-driven and evidenced-based. It will be decided upon by the (Monetary) Board. I cannot on my own decide on the path of the RRR but it will be taken up by the Monetary Board,” said Diokno.

In his first press briefing as BSP’s fifth governor on Friday, Diokno, who was the Duterte government’s budget secretary, said the central bank will continue to be an independent institution, again addressing fears from the market, the investing public, banking and corporate sector, that his position will not be abused by politicians, businessmen or even members of the Duterte economic team.

Diokno was known for his expansionary budget to accommodate the government’s ambitious “Build Build Build” infrastructure program. He has said that he did not apply for the BSP position, but that he was asked by Finance Secretary Carlos Dominguez III if he wanted to be included in the short list of would-be BSP governors that include the three deputy governors of the central bank.

In his opening statement, Diokno said price and economic stability – the primary mandates of the BSP – and ensuring the independence of the BSP will be his first concern and priority.

“In pursuing policy continuity, let me also assure you that the BSP will sustain its institutional independence, with the Monetary Board acting as a collegial body,” he said in his speech.

Later, in the question and answer portion, Dioko said: “I’m an action person. If there’s a decision, I think I want it done as soon as possible. No point postponing. If you have decided, you’re sure that’s the right thing to do, do it as soon as possible. I am known for that.”

Last Wednesday, Diokno told reporters that he expects inflation rate to decline to two percent by the third or fourth quarter and that he wants to expedite RRR cut.

He said that he’d like to see two more points of decline in the inflation rate, in March and April to review the RRR and the interest rates.

The market expects the BSP to reduce the RRR by another 200 basis points for this year to free up excess money supply in the system. Analysts also sees a policy rate easing by the second half of 2019.