The central bank of the Philippines lowered its benchmark interest rate for the third time as "the benign inflation outlook provides room for a further reduction in the policy rate to support economic growth and reinforce market confidence."
Bangko Sentral Ng Pilipinas (BSP) cut its overnight reverse repurchase rate (RRP) by another 25 basis points to 4.0 percent and has now cut it by 75 points this year following cuts in May and August as it continues to unwind last year's rate hikes of 175 points.
In addition to the rate cuts, BSP has also lowered the reserve requirement for banks by 2 percentage points in three stages to ease any tightness in liquidity.
"The Monetary Board's decision is based on its assessment that price pressures have eased further since the previous meeting," BSP said, adding the latest forecasts indicate inflation is likely to settle within the lower half of the bank's target range of 3.0 percent, plus/minus 1 percentage point for 2019 up to 2021 and inflation expectations still remain well-anchored within the target range.
This outlook for inflation is slightly down from BSP's view in August when it expected inflation to settle within the target range.
The central bank added prospects for global economic growth were likely to remain weak due to uncertainty over trade policies while firm domestic spending and progress on policy reforms will serve as a buffer against the global headwinds.
Inflation in the Philippines has been trending downward since hitting a 10-year high of 6.7 percent in September and October last year, with prices boosted by new taxes and food supply bottlenecks, and and fell to 1.7 percent in August from 2.4 percent in July.
The balance of risks to the outlook have shifted toward the upside for 2020, BSP said, adding they were now tilted to the downside for 2021.
Among the upside risks to inflation are volatile oil prices from geopolitical tensions in the Middle East and the potential impact of the African Swine Fever on food prices. On the other hand, subdued global economic activity is tempering inflation.
In addition to lowering its RRP rate, BSP also cut the rate on its overnight deposit and lending facilities to 3.5 percent and 4.5 percent, respectively.
Economic growth in the Philippines slowed to an annual rate of 5.5 percent in the second quarter of this year from 5.6 percent in the first quarter while the peso has remained relatively stable and was trading at 52.13 to the U.S. dollar today, up 0.8 percent this year.
Bangkok Sentral Ng Pilipinas issued the following press release:
"At its meeting on monetary policy today, the Monetary Board decided to cut the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 25 basis points (bps) to 4.0 percent, effective Friday, 27 September 2019. Accordingly, the interest rates on the overnight deposit and lending facilities were reduced to 3.5 percent and 4.5 percent, respectively.
The Monetary Board’s decision is based on its assessment that price pressures have eased further since the previous meeting. Latest baseline forecasts of the BSP continue to indicate that inflation is likely to settle within the lower half of the target band of 3.0 percent ± 1 percentage point for 2019 up to 2021. Inflation expectations also remain well-anchored within the inflation target range based on the BSP’s survey of private sector economists.
The Monetary Board also noted that the balance of risks to the inflation outlook have shifted toward the upside for 2020, while it is seen to tilt to the downside for 2021. Upside risks to inflation over the near term emanate mainly from volatility in oil prices due to geopolitical tensions in the Middle East and from the potential impact of the African Swine Fever outbreak on food prices. Meanwhile, the subdued pace of global economic activity continues to temper the inflation outlook.
At the same time, the Monetary Board believes that prospects for global economic growth are likely to remain weak owing mainly to uncertainty over trade policies. Firm domestic spending and progress on policy reforms will serve as a buffer against global headwinds.
Given these considerations, the Monetary Board believes that the benign inflation outlook provides room for a further reduction in the policy rate to support economic growth and reinforce market confidence. Going forward, the BSP will continue to monitor emerging price and output developments to ensure that monetary policy settings remain consistent with price stability while being supportive of sustained non-inflationary economic growth over the medium term."
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