By Lee Chipongian
The Bangko Sentral ng Pilipinas (BSP) slashed benchmark interest rates by 25 basis points (bps) to 4.50 percent as inflation continues to be manageable and the BSP has the flexibility to adjust rates lower, not strictly as support to economic growth.
BSP Governor Benjamin E. Diokno said that the Monetary Board, during its meeting Thursday, especially noted the impact of the budget impasse — delayed by four months — to the lower 5.9 percent GDP growth in the first quarter as one of the factors that was discussed during the monetary policy meeting. However, they also noted that the problem was government spending during the quarter and not consumption growth.
“Our decision to unwind is independent of what happens to government spending so it is not related to the underspending in the first quarter (of) 2019 which the DOF (Department of Finance) estimated was P1 billion per day,” said Diokno.
He said the BSP remains data-dependent but that they will review “from time to time what the current situation is and what’s the prognosis for the future. not only domestically but globally.”
Diokno said in deciding to reduce key rates, they took into consideration that domestic demand remain firm, supported by “a projected recovery in household spending and the continued implementation of the government’s infrastructure program.”
The Monetary Board also continue to assess that the risks to inflation outlook remain broadly balanced for the next two years even with risks of a prolonged El Nino dry-warm weather and rising global oil prices.
BSP Deputy Governor Diwa C. Guinigundo said inflation forecasts for 2019 and 2020 has been changed to reflect the latest data such as the lower April inflation of three percent.
The BSP forecasts a lower 2.9 percent 2019 inflation compared to the previous three percent. However, it raised the 2020 estimate to 3.1 percent from three percent.
The lower inflation for the last three months was one of the reasons for the lower forecast for this year. “Lower GDP is also one of the reasons for the decline in inflation forecast (2019). (Also the) lower M3 (domestic liquidity) growth as a consequence of the 175 bps tightening in monetary policy from May to November 2018. The lower global GDP is also one of the reasons for the lower forecast of 2.9 percent from three percent,” explained Guinigundo.
In the meantime, the higher 2020 inflation forecast of 3.1 percent from three percent was due to the higher global crude prices.
In the meantime, the 25 bps interest rate reduction will not have an immediate impact to economic growth due to a 12-15 month lag in monetary policy transmission. But, Guinigundo said they have started the normalization process in monetary policy stance.
The government said the economy could have expanded by 6.6 percent year-on-year in the first quarter 2019 if there had been no delays in the national budget implementation.
The 5.9 percent GDP growth in the first quarter – significantly slower compared to same time in 2018 of 6.5 percent – was the slowest growth in 16 quarters.
Diokno, former budget secretary, has said that he will be a pro-growth BSP governor.
The BSP’s overnight reverse repurchase rate — after a 25 bps cut — is now at 4.5 percent while its overnight lending is five percent and its deposit facility rate is four percent.