BSP trims interest rates given softer inflation, weak growth

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Metro Manila (CNN Philippines, August 8) — The Bangko Sentral ng Pilipinas (BSP) trimmed key interest rates by 25 basis points (bp) on Thursday, which followed an announcement of a disappointing economic growth in the second quarter.

BSP Governor Benjamin Diokno said that the benchmark rate will be reduced to 4.25 percent. This was the same reduction predicted by all 10 analysts in last week's poll by CNN Philippines. Key rates will now stand between 3.75-4.75 percent.

"The Monetary Board’s decision is based on its assessment that price pressures have continued to ease since the previous meeting," Diokno said during a press briefing, noting that price expectations have "moderated" and will certainly fall within the central bank's 2-4 percent target.

From a peak of 6.7 percent in September and October, inflation has decelerated to 2.4 percent this July — the lowest in over two years. The BSP said prices of rice and fuel have normalized coming from last year's spikes.

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

This is the second monetary easing unleashed by the central bank this year, after rates were reduced by 25bp back in May. That decision also came on the same day when the 5.6 percent first-quarter growth was announced by the Philippine Statistics Authority, with the blame still pinned on the four-month budget delay, as well as the 45-day election ban on public works and the prolonged dry spell that pulled down farm output.

BSP Deputy Governor Francisco Dakila, Jr. said the growth target "remains achievable," but would likely settle closer to the low end of the 6-7 percent range.

READ: BSP's Diokno defends 'pro-growth' tack

Diokno previously told CNN Philippines that it was only logical for the central bank to undo the series of rate increases in 2018 that raised borrowing rates by 1.75 percent. The rate increases were meant to douse surging inflation back then, he said.

He again hinted at more rate cuts after today's policy meeting, saying that "the benign inflation outlook provides room for a further reduction in the policy rate." This, he said, is a "preemptive" move against slowing global growth.

Diokno said last week that there's room to reduce benchmark rates by 50 bp for the second half of the year. Dakila said, however, that the BSP will remain data-driven.

There are three more rate-setting meetings scheduled this year, with the next one set on September 26.

"Domestically, the outlook for growth continues to be firm on the back of a projected recovery in household spending and the accelerated implementation of the government’s infrastructure spending program," said Diokno, a former economic manager. He expects a recovery in public construction, after it fell by 27.2 percent in the second quarter.

Still, inflation is seen to keep easing, with the BSP trimming its full-year estimate to 2.6 percent for 2019. Benign price increases are projected in the next two years, with the central bank seeing a 2.9 percent annual pickup for 2020 and 2021.

READ: Inflation seen below 4% until 2021

Dakila added that monetary officials did not discuss plans to scale down the reserve requirement ratio imposed on banks after a 200 bp reduction was introduced from May to July, but these talks remain on the table.

So far, the additional liquidity estimated at ₱200 billion mostly went into the central bank's auction facilities and into government-issued debt notes, Dakila said. Lower reserves unlock more funds which banks can deploy for loans and investments.