BSP cuts interest rates amid cooling inflation, disappointing GDP
MANILA, Philippines (Update 2, 5:32 p.m.) — The Bangko Sentral ng Pilipinas on Thursday cut its benchmark interest rate and hinted at further monetary policy easing amid cooling inflation and slower than expected economic growth in the second quarter.
At its meeting, the BSP’s monetary board decided to trim the key rate by 25 basis points to 4.25%, as widely expected.
The central bank also downwardly revised its inflation forecasts, with consumer price growth now seen averaging 2.6% this year from 2.7% previously. For 2020, the BSP expects inflation to settle at 2.9%, lower than its earlier projection of 3%.
Inflation in 2021 will likely remain at 2.9%, the BSP said.
“The Monetary Board’s decision is based on its assessment that price pressures have continued to ease since the previous meeting,” BSP Governor Benjamin Diokno said.
“The monetary board believes that a benign inflation outlook provides room for a further reduction in the policy rate as a pre-emptive move against risks associated with weakening global growth,” he added.
Inflation softened to 2.4% in July — the slowest rate in two years. Year-to-date, price growth averaged 3.3%, well within the state’s 2%-4% annual target.
Also on Thursday, the government announced that the economy expanded 5.5% in the second quarter, weaker than 5.6% recorded in the preceding three months after the delayed approval of the 2019 budget continued to stall state spending.
‘All options considered’
Banks typically use the BSP's benchmark rate as basis on charging their loans to consumers.
Lower interest rates encourage bank lending, injecting more money to the country’s financial system which, in turn, supports economic expansion.
Many central banks around the world have begun slashing interest rates in a bid to power growth amid headwinds that are cooling the global economy. Last week, the US Federal Reserve trimmed the benchmark interest rate for the first time in more than a decade to "insure against downside risks from weak global growth and trade policy uncertainty.”
The Philippine economy’s underwhelming performance in the April-June period fuelled expectations that the BSP would opt for a more aggressive easing at their Thursday meeting, with some analysts pencilling in a 50-basis point reduction to the policy rate.
Since becoming governor, Diokno — who is widely seen by the market as a pro-growth central bank chief — has given the economy a shot in the arm with a 50-basis point rate cut and 200-basis point reduction in bank reserves.
BSP Deputy Governor Franciso Dakila Jr. told a press conference that “all options were considered” by monetary authorities.
Dakila added that while the monetary board did not discuss the possibility of a new round of bank reserve cuts during its policy meeting, the topic “is a live discussion of the board.”
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