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Philippines Monetary Policy May 2019

Philippines: Central Bank cuts key rate amid weaker growth in Q1

At its 9 May monetary policy meeting, the Central Bank of the Philippines (BSP) cut the overnight reverse repurchase facility (RRP) to 4.50% from 4.75%, unwinding some of last year’s aggressive 175 basis point tightening. 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 also lowered 25 basis points to 4.00% and 5.00%, respectively. Market analysts had been relatively split on the outcome of the May meeting, with consensus marginally tilted towards a cut. While markets had also projected a cut to the 18% reserve requirement ratio (RRR), Governor Diokno noted officials will discuss lowering the ratio at a meeting in mid-May.

The BSP’s decision to loosen rates came on the heels of the release of Q1 GDP, which showed that growth slowed noticeably at the outset of the year. The budget delay, which took a bite out of government consumption expenditures, significantly contributed to the slowdown. Moreover, inflation maintained a downward trajectory—largely owing to improved food supply—and hit the midpoint of the Bank’s target range of 3.0% plus or minus 1.0 percentage point in April. Notably, the BSP downgraded its inflation expectations for its 2019 forecast to just below the midpoint and continues to see inflation fluctuating within the target band over this year and next.

The BSP provided little forward guidance in its communiqué apart from maintaining a data-dependent approach. However, several of our panelists see further monetary loosening on the cards.

Standard Chartered analysts, for example, explained:

“The combination of falling inflation and slow growth strengthens the case for BSP to unwind more of its 175bps of rate hikes in 2018. We see a further 75bps of rate cuts this year, taking the policy rate to 3.75% by year-end.”

Prakash Sakpal, an economist at ING, also sees a loosening ahead, albeit a more moderate one than projected by Standard Chartered. He noted:

“Although as of now, we don’t see this turning out to be an entrenched easing cycle, an aggressive 175bp policy tightening last year has created ample space for easing this year […] Our house view has one more 25bp rate cut pencilled in for the fourth quarter for the year, though an earlier cut than that would be a better pre-emptive cushion for the economy amid escalated global trade tensions.”

The next monetary policy meeting will be held on 20 June 2019.

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