Interest rates trimmed anew by 25 bps

THE Bangko Sentral ng Pilipinas ( BSP) resumed its monetary policy easing by cutting interest rates on Thursday, a widely anticipated move that some analysts expect would continue this year.

The central bank’s overnight borrowing, lending and deposit rates were reduced by 25 basis points to 3.75 percent, 4.25 percent and 3.25 percent, respectively, after its policy-making Monetary Board held its first rate- setting meeting for 2020.

In a briefing, BSP Governor Benjamin Diokno said “the Monetary Board concluded that the manageable inflation environment allowed room for a preemptive reduction in the policy rate to support market confidence,” given domestic and external considerations.

The Bangko Sentral’s latest baseline forecasts indicate a broadly steady path of inflation for 2020 and 2021, with average inflation remaining within the 2 to 4-percent target range, he added.

Also during the briefing, BSP Deputy Governor Francisco Dakila Jr. announced that monetary authorities raised their 2020 inflation forecast to 3.0 percent from 2.9 percent and kept their 2021 projection at 2.9 percent.

“When you look at the factors that led to the change in the forecast, they are really very short term,” he said.

The main factors considered for the revised 2020 forecast were the higher 2.5-percent and 2.9-percent inflation prints last December and January, respectively; diminishing base effects; impact of the 2019 novel coronavirus acute respiratory disease (2019-nCoV ARD); and adjusted oil price forecast of the central bank.

Diokno said risks to the inflation outlook continued to tilt slightly toward the upside in 2020 and the downside in 2021.

Upside risks to inflation over the near term come mainly from potential upward pressures on food prices, partly because of the African swine fever outbreak — which hit the country last year and has reached Mindanao — and tighter international supply of rice.

The BSP chief also said the Taal Volcano eruption last month and the impact of Typhoon (international name: Kammuri) last year continued to be a burden on the economy.

However, uncertainty over trade and economic policies in major economies continue to weigh down on global demand, thus mitigating upward pressures on commodity prices, he added.

Diokno also said the Monetary Board also observed that prospects for global economic growth had weakened further amid geopolitical tensions. It also noted that the spread of 2019- nCoV could have an adverse impact on economic activity and market sentiment in the coming months.

The board, he added, believes that a policy rate cut would provide additional policy support to ward off potential spillovers associated with increased external headwinds, although recent demand indicators still point to a firm outlook for the domestic economy.

More easing seen

Analysts from Capital Economics, Security Bank Corp. and ING Bank Manila projected more interest rate cuts in the coming months.

In a comment, Capital Economics’ Alex Holmes said that

“with growth set to disappoint and inflation likely to remain within the BSP’s target range, we expect more easing later in the year.”

He also said that even before 2019-nCoV broke out, the research consultancy firm doubted that the 6.4-percent growth seen in the fourth quarter would be sustained.

With that, Philippine economic growth looks even more likely to fall short of the government’s 6.5 to 7.5 percent target for this year, Holmes added.

Barring a sudden change in sentiment, Holmes said Capital Economics would still stick with its forecast that the central bank would cut rates by 50 basis points in total this year.

For his part, Security Bank chief economist Robert Dan Roces said “we think the BSP still has enough policy space left and will not be afraid to inject more stimulus should the need warrant it.”

And ING’s senior economist Nicholas Antonio Mapa said “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.”