Philippines: BSP cuts rates in August and signals further easing ahead
At its 8 August monetary policy meeting, the Central Bank of the Philippines (BSP) cut the overnight reverse repurchase facility (RRP) by 25 basis points to 4.25%, as had been expected by market analysts. Likewise, the overnight deposit facility (ODF) and the overnight lending facility (OLF) rates—which establish the floor and the ceiling of the interest rate corridor system—were reduced to 3.75% and 4.75%, respectively. The Bank’s decision follows its 25-basis-point rate cut in May, as the BSP continues to unwind some of last year’s aggressive 175-basis-point tightening.
The Bank’s decision was underpinned by the sustained downtrend in inflation against the backdrop of an economic slowdown and a more dovish U.S. Federal Reserve. Inflation fell to 2.4% in July, which was well within the Bank’s target range of 3.0% plus or minus 1.0 percentage point, while the BSP now projects it to remain well anchored within that range until 2021. The BSP assesses inflationary risks to be broadly balanced, with the global economic downturn representing a downside risk, whereas upward pressures from a prolonged El Niño are dissipating. Consequently, softer inflation allowed the BSP space to focus on the economy which slowed to a four-year low in the second quarter.
In its communiqué, the BSP struck a dovish tone, noting that headwinds from trade tensions will continue to dampen global economic activity. Although the Bank projects the domestic economy to rebound in H2, thanks to a rebound in government consumption and a pick-up in household spending, the BSP appears more concerned about the impact of a more adverse external environment. The Bank noted that “the benign inflation outlook provides room for a further reduction in the policy rate as a pre-emptive move against the risks associated with weakening global growth.”
Summarizing ING’s take on the Philippine’s monetary policy moving forward, Nicholas Mapa, senior economist at ING, noted:
“We expect the BSP to cut policy rates again by 25 bps at the September meeting given previous comments from Governor Diokno pointing to a total of 50 bps worth of rate cuts before the end of the year. […] With the BSP’s recent string of easing and government spending back online in 2H, the Philippines will look to finish the year strongly, with growth fueled by all sectors of the economy to get it above 6% by the end of the year.”
The next monetary policy meeting will be held on 26 September 2019.