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Philippines Monetary Policy September 2019

Philippines: BSP delivers its third rate cut this year in September and signals room for further easing

At its 26 September monetary policy meeting, the Central Bank of the Philippines (BSP) cut the overnight reverse repurchase facility (RRP) by 25 basis points to 4.00%, as had been expected by market analysts. Subsequently, 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 3.50% and 4.50%, respectively. The Bank’s decision follows its 25-basis-point rate cuts in May and August, as the BSP continues to unwind some of last year’s aggressive 175-basis-point tightening. Moreover, on 27 September, the Monetary Board voted to reduce the reserve requirement ratio by 1.0 percentage point to 15% in a bid to spur domestic credit activity.

The Bank’s decision was guided by decelerating inflation amid a weaker global economic backdrop. Inflation fell to 1.7% in August (July: 2.4%) and the BSP continues to expect it to fluctuate within the lower half of the Bank’s target range of 3.0% plus or minus 1.0 percentage point through 2021. That said, the Bank now sees inflation risks to be tilted to the upside for 2020 rather than being “broadly balanced” as it had stated in August’s press release, owing to the potential impact of both Middle East tensions on oil prices and the African swine fever outbreak on food prices. However, slower economic activity should partially counter those effects.

In its communiqué, the BSP turned more dovish, citing that “the benign inflation outlook provides room for a further reduction in the policy rate to support economic growth and reinforce market confidence” and replacing August’s rhetoric of a pre-emptive move against risks. While this leaves the door open for more easing, the majority of FocusEconomics panelists forecast the policy rate to end 2019 at 4.00% in last month’s publication.

For example, Chidu Narayanan, an economist at Standard Chartered, explained:

“We now see no further BSP policy rate cuts this year (versus our previous call of one more 25bps cut in November), as BSP was only mildly dovish at the September meeting and expressed concerns about inflation; we believe the RRR is now its preferred monetary policy easing tool.”

Analysts at Nomura also see September’s cut as the end of the easing cycle, commenting:

“We maintain our view that yesterday’s cut was the last in this cycle, and we expect BSP to leave it unchanged at 4% for an extended period. This forecast is premised on our view that headline inflation will start to rise again in Q4 back towards the BSP’s 2–4% target range, while GDP growth should accelerate sharply to 6.4% in H2”.

The next monetary policy meeting is scheduled for 14 November.

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