The Philippine central bank cut its benchmark overnight reverse repurchase rate by 25 bps to 3.75 percent, saying "the manageable inflation environment allowed room for a preemptive reduction in the policy rate to support market confidence" and ward off "the potential spillovers associated with increased external headwinds."
The rate cut by Bangko Sentral Ng Pilipinas (BSP), its fourth since May 2019, was widely expected as Governor Benjamin Diokno on Feb. 5 said it would be better to cut interest rates sooner than later, adding the central bank is still looking to unwind the 2018 rate hikes and expects to cut rates by 50 basis points this year.
The outbreak of the coronavirus, which poses a new and unexpected risks to economic growth across Asia, boosted rate cut expectations further.
BSP raised its rate by 175 basis points in 2018 to curb inflationary pressures from a fall in the peso and then unwound 75 points of this in 2019, leaving 100 basis points to be reversed.
In today's statement, BSP's monetary board said inflationary expectations remain anchored within the target range of 3.0 percent, plus/minus 1 percentage point, and inflation is seen broadly steady in 2020 and 2021, with average inflation in the target range.
Upside risks to prices from the outbreak of the African Swine Fever, tight supply of rice, and the ongoing Taal volcano eruption and aftermath of typhoon Tisoy are mitigated by uncertainty over trade and economic policies that weigh on global demand while the prospects for global economic growth have weakened amid geopolitical tensions.
"At the same time, the Monetary Board noted that the spread of the 2019 novel coronavirus could have an adverse impact on economic activity and market sentiment in the coming months," BSP said.
Inflation in the Philippines rose to 2.9 percent in January from 2.5 percent in December while the economy expanded by an annual 6.4 percent in the fourth quarter of 2019 for full-year growth of 5.9 percent, down from 6.2 percent in 2018 amid delays in the budget approval.
The government targets 2020 economic growth of 6.5 to 7.5 percent but industrial output is still contracting, with output in December down 9.5 percent year-on-year, the 13th consecutive month of a decline and the steepest fall since August 2019.
After falling steadily from March 2013 to September 2018, the Philippine peso has been rising in the last 16 months but was steady in the wake of the rate cut, trading at 50.7 to the U.S. dollar from 50.8 at the start of the year.
Bangko Sentral Ng Pilipinas issued the following statement:
"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 3.75 percent. The interest rates on the overnight lending and deposit facilities were reduced to 4.25 percent and 3.25 percent, respectively.
Latest baseline forecasts indicate a broadly steady path of inflation for 2020 and 2021, with average inflation remaining within the target range of 3.0 percent ± 1 percentage point. Inflation expectations also continue to be firmly anchored within the target over the policy horizon. Meanwhile, the risks to the inflation outlook continue to tilt slightly toward the upside in 2020 and toward the downside in 2021. Upside risks to inflation over the near term emanate mainly from potential upward pressures on food prices owing in part to the African Swine Fever outbreak and tighter international supply of rice. Moreover, there continues to be the burden on the economy posed by the ongoing Taal volcano eruption and the aftermath of typhoon Tisoy. However, uncertainty over trade and economic policies in major economies continue to weigh down on global demand, thus mitigating upward pressures on commodity prices.
The Monetary Board also observed that prospects for global economic growth have weakened further amid geopolitical tensions. At the same time, the Monetary Board noted that the spread of the 2019 novel coronavirus could have an adverse impact on economic activity and market sentiment in the coming months.
Given these considerations, the Monetary Board concluded that the manageable inflation environment allowed room for a preemptive reduction in the policy rate to support market confidence. While recent demand indicators still point to a firm outlook for the domestic economy, the Monetary Board believes that a policy rate cut would provide additional policy support to ward off the potential spillovers associated with increased external headwinds.
Going forward, the BSP will remain watchful over emerging price and output conditions to ensure that monetary policy settings remain consistent with price stability while supporting sustained non-inflationary growth over the medium term."
www.CentralBankNews.info
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