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Philippines Monetary Policy November 2019

Philippines: BSP keeps rates on hold in November and signals a move to the sidelines for now

At its 14 November monetary policy meeting, the Central Bank of the Philippines (BSP) maintained the overnight reverse repurchase facility (RRP) at 4.00%, in line with market expectations. Correspondingly, 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 left unchanged at 3.50% and 4.50%, respectively. The decision to hold fire comes after a collective 75 basis points of unwinding this year and the cut in reserve requirement ratios in September, reversing some of last year’s aggressive 175-basis-point tightening.

The Bank chose to pause its monetary easing cycle as inflation continued to fall below the Bank’s target range of 3.0% plus or minus 1.0 percentage point to 0.8% in October. The Bank see risks tilting to the upside for 2020 due to potentially higher food prices caused by the African swine fever and volatile oil prices amid ongoing Middle East geopolitical tensions. However, slower global economic activity should partially counter those effects. The Bank continues to expect inflation to fluctuate within the lower half of the Bank’s target range of 3.0% plus or minus 1.0 percentage point through 2021. Moreover, economic growth accelerated in Q3 and should remain strong in the quarters to come.

In its communiqué, the BSP signaled that it deems its current stance appropriate for the time being, as the inflation outlook remains benign and the economic outlook more favorable. The Bank noted “a prudent pause in monetary adjustments will enable the cumulative 75-basis-point reduction in policy rates as well as the cut in reserve requirement ratios to continue working their way through the economy.” The Bank seemingly passed the stimulus torch to the government, commenting that the BSP is confident the 2020 fiscal budget will be passed before year end, which should provide a boost to economic growth. The majority of FocusEconomics panelists forecast the Bank to remain on hold at its next meeting on 12 December, but to then return to easing again in 2020 if GDP growth misses the government’s target.

Commenting on the significance of a “prudent pause” and the implications for their monetary policy outlook, Euben Paracuelles, an analyst at Nomura, explained:

“This phrase was used by BSP at its June meeting, when it surprised with a decision to keep the RRP rate unchanged. The fact that BSP followed up with rate cuts in August and September may give the impression that a “prudent pause” is temporary and hence BSP may resume rate cuts. But we think the context is very different from that of June in that the growth outlook has improved significantly. […] Overall, our view remains that the cutting cycle of the policy rate is over, and we reiterate our forecast that the RRP will be kept unchanged at 4.00% throughout 2019-20.”

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