More interest rate cuts coming, BSP chief hints

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Metro Manila (CNN Philippines, July 26) — The Bangko Sentral ng Pilipinas (BSP) will be trimming interest rates further, with Governor Benjamin Diokno saying it was only “logical” to undo last year’s tightening moves now that inflation has cooled.

The central bank chief said the 2018’s series of rate hikes worth 175 basis points (bp) — which brought the benchmark interest rate to a decade-high of 4.75 percent — needs to be undone as consumer prices are stabilizing.

“Now, things have normalized. The conditions that were necessary to increase interest rates are not there anymore,” Diokno told CNN Philippines in an interview. “So logically, we have to start the process of easing interest rates to go back to normal. You can expect some movements in the months to come.”

Last year saw inflation spike to as fast as 6.7 percent, blamed on rice and food supply troubles, rising global oil prices, and higher taxes due to the Tax Reform for Acceleration and Inclusion law. To rein in surging price expectations, the seven-man Monetary Board led by then-BSP Governor Nestor Espenilla, Jr. had to fire five consecutive rate increases from May to November.

Inflation has since tempered to 2.6 percent in June, with the central bank seeing the downtrend sustained for the rest of the year. The BSP’s full-year forecast stands at 2.7 percent, marking a return to the 2-4 percent target range and slowing from 2018’s 5.2 percent pace.

The Monetary Board voted to slash the key rate to 4.5 percent during its May 9 meeting, followed by a “prudent pause” last month to see how the rate cut will affect financial markets.

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

For their Aug. 8 review, Diokno said they will be factoring in freshly-released data: the July inflation print and second-quarter economic expansion: “We look at the sources of growth for the second quarter, and on that basis we will be making our decision.”

READ: Gov't keeping up hopes of 6-7% growth this year

Diokno has been branded as a "pro-growth" central banker, which he defended by saying that ensuring stable prices should be supportive of a "sustained, balanced, and inclusive" economic boom.

Reserve cuts

Diokno, a former Budget secretary before taking the helm of the BSP, added that the economy can grow by “at least 6 percent” this year, even after a four-year slump at 5.6 percent during the first three months.

Diokno earlier said that an interest rate cut will come before a fresh reduction in banks’ reserve requirement ratio (RRR). Reserves have been slashed in three moves from 18 percent to 16 percent by end-July. The four-month BSP chief added that the plan to lower the reserve standard to single-digit by 2023 is on track.

Every 1 percent cut in the RRR will unlock some ₱100 billion in the banking system, which can be lent out or invested by lenders for bigger profits. The move is also expected to reduce borrowing costs, as it makes lending cheaper.

‘Seamless’ transition

Diokno, who will sit as BSP governor until July 2023, said he’s had an “almost seamless” transition coming from President Rodrigo Duterte’s economic team.

The new central banker said he thinks the President wants him to take charge in implementing key reforms like changes to the Central Bank Act, the National Payments System Act, and the law allowing Islamic banking.

“Many laws were passed in recent days, so, I thought that I was placed here so I'd be able to implement some of these legislation,” Diokno said.

The seasoned economist is known for budgeting and fiscal policy. He took the helm of the central bank in March to serve the unexpired term of Espenilla, who passed away after a bout with tongue cancer. The BSP is mainly concerned about monetary policy, price stability, and oversight on banks and other financial entities.