BSP trims interest rates amid softer inflation, slow growth

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Metro Manila (CNN Philippines, May 9) — The Bangko Sentral ng Pilipinas (BSP) slashed interest rates on Thursday, the first since a series of policy hikes introduced in 2018.

BSP Governor Benjamin Diokno said that benchmark interest rates will be reduced by 25 basis points (bp) effective Friday to the 4-5 percent range, citing a "manageable" inflation outlook. The key rate will be at 4.5 percent.

This comes after five rate hikes worth 175bp in 2018, which were meant to temper surging prices of basic goods.

The interest rates set by the BSP are used as benchmark for banks and other financial firms in setting loan and deposit rates.

“The Monetary Board's decision is based on its assessment that the inflation outlook continues to be manageable, with easing price pressures owing to the decline in food prices amid improved supply conditions,” Diokno said in a media briefing.

From a peak of 6.7 percent, inflation has softened for six straight months to end at three percent in April. Inflation averaged 3.6 percent during the first four months of 2019.

The central bank now sees inflation settling lower this year at 2.9 percent from its previous three percent estimate. For 2020, prices are seen to rise by 3.1 percent, well within the 2-4 percent target.

Shortly after the release of the slower-than-expected growth pace in the first quarter, market analysts said the central bank will need to reduce borrowing rates to stimulate a slowing economy.

“Growth may slow further in subsequent quarters if the BSP does not engage in immediate and adequate monetary accommodation,” HSBC economist Noelan Arbis said in a market commentary.

However, Diokno clarified that the rate cut is not a direct response to the disappointing first-quarter growth figure at 5.6 percent, which was well below expectations.

“Our decision to unwind is independent of what happens to government spending. It’s really not related to the underspending that happened in the first quarter of 2019,” said Diokno, a former Budget chief.

Public construction contracted by 8.6 percent, reeling from a four-month delay in the 2019 budget which left new and continuing projects unfunded.

READ: Growth slows to 5.6% in Q1

The BSP said domestic demand remains firm despite the impact of budget delays on near-term economic activity. However, slowing global growth warrants “careful monitoring.”

Meanwhile, monetary officials did not touch the reserve requirement ratio (RRR) imposed on big banks, with the BSP chief saying it will be discussed “next week.”

“It’s on the table, but we did not decide today,” Diokno said.

The RRR is currently at 18 percent following two reductions early last year, but remains among the highest in the world. It has been described as a tax on banks, as this is the amount of deposits which they cannot hand out as loans.

Several bank economists have called for reserve cuts, citing tight money supply in the financial system.