Rate cut on the table in May meeting

The Philippines central bank is on course to cut its key rate as inflation cools, and policy easing will be on the table as soon as the May 9 meeting, Governor Benjamin Diokno said.

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno. (Bloomberg photo) Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno. (Bloomberg photo)

“It’s not a matter of whether we cut, it is when,” Diokno told Bloomberg Television’s Kathleen Hays in Washington D.C., where officials are gathered for the spring meetings of the World Bank and the International Monetary Fund. “We are considering it. I’m sure that will be in the agenda in the next policy meeting.”

Consumer prices eased for a fifth consecutive month to 3.3 percent in March from a year earlier, with the average falling within the central bank’s 2 percent to 4 percent target. Bangko Sentral ng Pilipinas left the benchmark rate unchanged at 4.75 percent at its last three meetings while waiting for inflation to be firmly entrenched in the target range.

The governor’s comments came as Philippine economic officials expect the delay in this year’s budget approval to have trimmed first-quarter growth by almost 1 percentage point. A reduction in banks’ reserve requirement ratio, which at 18 percent remains among the highest in the region, is on the table “all the time.”

“It’s a question of timing, which will be first, the rates cut or the cut in the reserve ratio,” said the governor.

“Now that inflation has normalized, I think there’s a room for some easing or relaxation,” the governor said. “But we have to look at other threats,” he said, citing rising oil prices and the impact of the El Niño dry weather on food costs. Diokno is echoing some of the cautious tone of Deputy Governor Diwa Guinigundo, a four-decade veteran of the BSP.

The 71-year-old governor, a former economics professor and budget secretary, was appointed in March to complete the unfinished term of Nestor Espenilla who died of cancer. Diokno, whose term ends in 2023, was perceived as pro-growth and tolerant of a weaker currency.

When asked if he’s confident that the peso won’t come under attack when the Philippines starts easing, he said “we’re not scared of any attack because number one, our currency is based on floating exchange rate, so it will be determined by supply and demand of currency.”

Diokno cited hefty foreign exchange reserves and robust dollar inflows from overseas Filipinos, tourism receipts and outsourcing revenue.
The peso fell as much as 0.5 percent in early trade on Friday, halting a two-day rally.

Last year, some analysts said Bangko Sentral was behind the curve after it started raising its key rate only in May, two months after inflation had accelerated to a five-year high.

Diokno assured the policy easing will happen at the right time. “As you know, monetary policy works with a lag, nine-month lag. If you cut rates now, it doesn’t make a difference the following day,” he said. “We will try to make it timely.”

Meanwhile, first quarter growth “will not be as robust as we have planned” because of the 2019 budget delay, Finance Secretary Carlos Dominguez said in a media roundtable. Growth may have been trimmed by 0.7 to 0.9 percentage point last quarter, Economic Planning Secretary Ernesto Pernia said at the briefing. A typical 0.5 to 1 percentage point boost from election spending could help offset the slowdown, Pernia said. (Bloomberg)