BSP chief hints of 50 bps rate cut in 2020

MANILA, Philippines — Monetary authorities are set to resume an easing cycle with 50 basis points (bps) of cumulative rate cuts next year amid a benign inflation environment.

In an interview with Bloomberg TV, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the Monetary Board could resume the reduction of benchmark rates as early as February or as late as the second quarter of 2020.

“I think we are considering maybe around 50 basis points next year and we have more time on the reserve requirement because my promise is that we would cut the reserve requirement to single digit by the end of my term which is 2023,” Diokno said.

The Monetary Board chaired by Diokno slashed interest rates thrice for a total reduction of 75 bps this year, partially unwinding a tightening cycle that saw interest rates jump by 175 bps in 2018 as inflation shot up to 5.2 percent.

The inflation figure exceeded the BSP’s two to four percent target due to elevated oil and rice prices as well as a weak peso.

It also lowered the reserve requirement ratio for big and mid-sized banks by 400 bps and for small banks by 200 bps to free up much needed funds to boost economic activity.

The BSP adopted a prudent pause last Nov. 14 and Dec. 12 to allow previous monetary actions to work their way through the economy.

The central bank has committed to lower the level of deposits banks are required to keep with the central bank to single digit level by 2023. It reduced the RRR by 600 bps to 14 percent in 2018 and 2019.

“As you know monetary policy works with a lag that is why we have to stop at this point then find out how they will respond to the significant cuts in the reserve requirement,” the BSP chief said.

 The lag is around six to nine months, he said.

 Diokno said the BSP would remain data dependent and evidenced-based in setting the country’s monetary policy stance.

 According to the pro-growth BSP governor, the actions of monetary authorities would help attain the gross domestic product (GDP) growth target set by economic managers.

 “So whatever actions we’ll take will be consistent with the growth target of the Philippine government which we expect to grow between 6.5 and 7.5 percent up to 2022,” Diokno said.

Based on its latest assessment, the BSP sees inflation averaging 2.4 percent this year before picking up to 2.9 percent in 2020 and 2021.

“So we are pretty happy where we are heading in the next two years,” he said.

BSP assistant governor Iluminada Sicat said the inflation forecast for 2019 to 2021 are broadly unchanged compared to the previous round as the recent peso appreciation offset the uptick in global crude oil prices.

“Inflation is expected to approach the target band after bottoming out in October and settle close to the midpoint of the target by 2020 and 2021 as base effects start to dissipate,” Sicat said.

Upside risks to inflation include potential volatility in international oil prices amid geopolitical tensions in the Middle East as well as from the potential impact of the African swine fever outbreak and recent weather disturbances on domestic food prices.