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Philippines Monetary Policy February 2020

Philippines: BSP returns to easing cycle in February

At its 6 February monetary policy meeting, the Central Bank of the Philippines (BSP) cut the overnight reverse repurchase facility (RRP) from 4.00% to 3.75%, as had been expected by market analysts. Accordingly, the overnight deposit facility (ODF) and the overnight lending facility (OLF) rates—which establish the floor and the ceiling of the interest rate corridor—were also reduced to 3.25% and 4.25%, respectively. The Bank’s first move of this year follows cuts totaling 75 basis points in 2019.

The Bank’s decision to cut rates was a preemptive strike to ward off a slowdown from temporary domestic economic disruptions and growing uncertainty over the global economy amid growing concerns about the coronavirus. The Bank’s assessment of the economic trajectory was notably more downbeat in February from its last meeting in December. It highlighted the likely toll of the recent Tall volcano eruption and Typhoon Tisoy on economic activity, which have disrupted supply chains, weighed on tourism, and pushed up food prices. Moreover, lingering uncertainty over global trade and geopolitical tensions remain on the periphery. The BSP also highlighted the recent outbreak of the coronavirus in China: It has already dampened market sentiment and could drag on growth in Asia’s largest economy, which is also an important export market for the Philippines. That said, the Bank did state that “recent demand indicators still point to a firm outlook for the domestic economy”.

Turning to inflation, expectations for this year remain well anchored. Inflation jumped to 2.9% in January (December: 2.5%), approaching the midpoint of the Bank’s target range of 3.0% plus or minus 1.0 percentage point. Moreover, the BSP sees inflation remaining comfortably within the target range this year and next, despite a slight upward bias in risks to the outlook for 2020. Upside pressures largely stem from the African swine fever’s impact on food prices and tighter international rice supply.

In its communiqué, the BSP stated that it “will remain watchful over emerging price and output conditions” returning to its wait-and-see approach, as its prior easing continues to take effect. Nevertheless, the release was relatively devoid of further forward guidance. In January, the majority of FocusEconomics panelists expected the Bank would end its easing cycle after this February cut. Our panelists are taking recent developments into account and new forecasts will be available 25 February.

Assessing this year’s monetary policy outlook, Jonathan Sequeira and Andrew Tilton, economists at Goldman Sachs, noted:

“As growth remains below trend and inflation well within the inflation target band, we expect the BSP to cut policy rates by another 25bp in Q2 2020. However, the recent firming in inflation momentum skews risks to our forecast in a slightly more hawkish direction, i.e. a later cut than we currently expect.”

The next monetary policy meeting is scheduled for 19 March 2020.

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