More room to cut rates in Q3 — Benjamin Diokno

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) said monetary authorities have more leeway to ease this quarter amid the country’s easing inflation and the dovish US Federal Reserve.

BSP Governor Benjamin Diokno said further improvement in the domestic inflation outlook and the anticipated move of the US Fed to cut its own key rate have given the BSP additional room for monetary easing.

Noting that the BSP was already poised to do a rate cut soon even without an action from the Fed, Diokno said a policy rate cut by the US central bank “provides additional input to our BSP’s decision.”

The next gathering of the US Fed is set at the end of July, when it is expected to ease monetary policy to help offset impact of a lackluster external environment on the US economy. The BSP, on the other hand, is set to gather its Monetary Board for the next round of policy setting meeting on Aug. 8.

While the BSP has cited a wide range of factors affecting its own policy decision – and has maintained it does not need to follow the lead of the US central bank – any action of the US Fed certainly is among the factors that the BSP takes into account.

Federal Reserve chairman Jerome Powell suggested last week the US central bank has room to ease monetary policy as the tie between inflation and the jobless rates has broken down.

Meantime, the much better inflation outlook has also given the BSP more room for monetary easing.

Based on its latest estimate as of June 20, the BSP sees inflation settling at 2.7 percent this year and three percent next year.

Inflation eased to a 22-month low of 2.7 percent in June from 3.2 percent in May, bringing the average to 3.4 percent in the first half and within the central bank’s two to four percent target.

Asked by reporters if the latest inflation forecasts further pushed the BSP toward an easing bias, the BSP chief answered in the affirmative and cited the potential timing of easing. “Yes, especially in the third quarter,” Diokno said.

Monetary authorities hit the pause button last June 20 and kept interest rates unchanged to assess and evaluate the impact of previous monetary actions.

Following a series of rate hikes in 2018 meant to better anchor inflation expectations and arrest potential second-round effects amid an elevated inflation environment, the BSP has shifted as it slashed interest rates by 25 basis points on May 9 given much favorable inflation outlook as well as slower than expected gross domestic product (GDP) growth in the first quarter.