BSP trims interest rates as rising food prices, coronavirus outbreak spook markets

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The Bangko Sentral ng Pilipinas trims key interest rates by 25 basis points in its Thursday policy meeting — a preemptive move ahead of higher prices and market jitters amid the novel coronavirus outbreak.

Metro Manila (CNN Philippines, February 6) — The Bangko Sentral ng Pilipinas (BSP) has trimmed interest rates on Thursday, giving a fresh stimulus to the economy as inflation picks up.

The key interest rate would be reduced by 25 basis points (bp) to 3.75 percent, while the overnight deposit and lending rates will go down to 3.25 percent and 4.25 percent, respectively. Banks and other lending firms use the BSP's rates as their benchmark in setting loan, credit card, and deposit rates.

BSP Governor Benjamin Diokno said that while inflation remains broadly steady, risks drawn from higher food prices as well as the novel coronavirus outbreak could dampen market activity and sentiment.

"The Monetary Board concluded that the manageable inflation environment allowed room for a preemptive reduction in the policy rate to support market confidence," Diokno said in a media briefing.

BSP Deputy Governor Francisco Dakila, Jr., however, said the coronavirus scare would likely just have a short-term impact on the economy while there's still no cure for the disease and as the number of cases rise. "Once it turns out to be under control, sentiment can shift quite quickly," he said, adding that there's sufficient policy space to provide a further boost to the economy.

READ: Coronavirus death toll spikes again as outbreak shows no signs of slowing

Inflation has been on an uptrend for the third straight month, with prices of basic goods rising by 2.9 percent in January. The central bank said higher oil prices and new taxes on select commodities would drive faster price increases.

Still, the central bank sees full-year inflation within 2-4 percent, coming from a 2.5 percent climb in 2019. Latest forecasts show a 3 percent estimate this year.

This is the fourth easing move of the BSP meant to slowly unwind 175 bp rate hikes it unleashed in 2018.

Two market watchers expect another interest rate cut from the central bank. Union Bank of the Philippines chief economist Ruben Carlo Asuncion said the Monetary Board will more likely consider another reduction in benchmark yields as early as their March 19 meeting as the "window is closing very fast" as the coronavirus outbreak spooks markets.

Citing the experience from the 2003 Severe Acute Respiratory Syndrome or SARS, Asuncion said the novel coronavirus could slash about $600 million from the domestic economy, or 0.8 percentage points off economic growth if the scare lasts for six months.

Security Bank chief economist Robert Dan Roces said separately that there's enough policy space left for the BSP to infuse additional stimulus, but noted that the central bank will likely leave the reserve requirement for banks steady for now, after a series of reductions left the level at 14 percent of deposits as of December.