Slowing inflation warrants another rate cut—DOF

The Bangko Sentral ng Pilipinas (BSP) has extra room to further reduce its key interest rates following the significant slowdown in the rate of increase in consumer prices in September and also to boost economic growth, the Department of Finance (DOF) said yesterday.

Finance Undersecretary Gil S. Beltran said the 0.9 percent inflation last month may warrant another 25 basis points (bps) cut in the central bank’s policy rates to stimulate the country’s economy currently below government’s target.

“The continuing drop in inflation has given economic authorities policy room to loosen liquidity, enabling a cut to the policy rate by another 25 bps,” Beltran said in his report submitted to Finance Secretary Carlos G. Dominguez III.

Beltran, who is also the DOF’s chief economist, believes that further reduction in BSP’s interest rates "coupled with efficient implementation of the catch-up spending program will boost economic growth in the last quarter of the year.”

At end-June, the average GDP stood at 5.5 percent, lower than the government’s full-year goal of six to seven percent.

Last month, the Monetary Board of the BSP trimmed its benchmark interest rates for the third time this year, placing the central bank’s overnight reverse repurchase, as well as overnight deposit and lending to four percent, 3.5 percent and 4.5 percent, respectively.

A day after the policy rate setting meeting, the BSP also slashed its reserve requirement ratio (RRR) by one percentage point to 15 percent for big banks, five percent for thrift banks and three percent for rural and cooperative banks.

The RRR cut immediately released about 190 billion to 195 billion in liquidity to the local financial market.

Last Friday, the Philippine Statistics Authority reported a September inflation of 0.9 percent from August’s 1.7 percent. It is the lowest level in 40 months. Last year same period, inflation hit a peak of 6.7 percent.

“The deceleration in prices is accounted for by both food and non-food items. In particular, rice and vegetable prices continued to drop. Likewise, meat and fish inflation slowed down due to base effects,” Beltran said.

Non-food inflation was also tempered by the downward adjustment in electricity rates and the 0.13 percent year-onyear drop in Dubai crude petroleum price from $62 in September 2018 to $53 per barrel.

“For the rest of the year, assuming month-on-month price growth of at most 0.2 percent as in September, monthly inflation will be likely still below one percent in October before making upward corrections in the final two months,” the finance official said.

The slower inflation rate last month brought the January to September average to 2.8 percent, well within the Duterte administration’s two percent to four percent target for 2019.