BSP keeps interest rates steady with inflation in check

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Metro Manila (CNN Philippines, December 12) — Borrowing rates would remain steady until early next year after the Bangko Sentral ng Pilipinas (BSP) kept benchmark yields unchanged this week.

The Monetary Board decided to keep the key policy rate at 4 percent during their Thursday meeting, their last for 2019. The overnight deposit and lending rates stayed at 3.5 percent and 4.5 percent, respectively.

"The Monetary Board is of the view that within-target inflation outlook and solid prospects for domestic growth support keeping monetary policy settings steady," BSP Governor Benjamin Diokno said in a media briefing. He added that "benign" inflation will continue until 2021.

READ: BSP done with rate cuts for 2019

The decision to hold fire on rates came after three easing moves, which saw monetary officials slash key rates by a total of 75 basis points as inflation returned to the government's 2-4 percent target range, even if the central bank sees prices rising faster in 2020 and 2021.

Diokno said volatile world crude prices, adverse weather conditions, and the possible impact of the African Swine Fever on products could push the cost of basic goods up, but may be offet by slower global economic activity and the long-standing trade war between the United States and China.

Banks and other lending firms use the BSP's rates as their benchmark in setting loan, credit card, and deposit rates.

Growth is seen to remain strong due to higher government spending boosted by lower interest rates for loans. President Rodrigo Duterte's economic managers expect 2019 growth to average between 6 and 6.5 percent, before climbing to 6.5-7.5 percent annually from 2020 to 2022.

These adjustments were accompanied by cuts in the reserve requirement for banks. Universal and commercial banks are required to keep 14 percent of total deposits by yearend. This effectively leaves the banks with more money to lend at a cheaper rate.

READ: BSP delivers another cut in bank reserves by December

Inflation averaged 2.5 percent from January to November, well within target. The BSP expects the full-year pace to average 2.4 percent, slower than 2018's 5.2 percent surge in commodity prices. Inflation is seen to pick up to 2.9 percent for both 2020 and 2021.

Meanwhile, BSP Assistant Governor Iluminada Sicat said hints from the United States Federal Reserve that it will keep yields on hold next year is "good news" for Philippine markets, as it would provide "greater flexibility in terms of setting our policy rate." 

The Monetary Board will reassess interest rate settings on February 6, 2020.

In separate commentaries, two market watchers said they expect the BSP to return to easing mode in the first few months of 2020. 

ING Bank senior economist Nicholas Antonio Mapa said he sees another 25bp as early as February to follow up a "relatively disappointing" economic growth path this year. This would be later on followed by another cut of equal magnitude, while Mapa said reserve reductions would likely come later.

Meanwhile, Security Bank chief economist Robert Dan Roces said keeping the status quo on rates is "prudent" to allow authorities to observe how the financial market absorbs last year's unwinding moves.