By LEE C. CHIPONGIAN
With a below 6.0 percent GDP growth posted for 2019, the market and investors think February 6, which is the first monetary policy meeting of the Bangko Sentral ng Pilipinas’s (BSP) Monetary Board, will be a good time to cut key rates anew to further stimulate economic activity.
“With growth momentum apparently still sluggish, the need for additional stimulus from both the fiscal and monetary authorities is now even more apparent. We continue to price in a rate cut by the BSP in February, followed up by further easing in May to help rekindle the now scuttled new Philippine growth story,” said ING Bank senior economist, Nicholas T. Mapa.
Last year, the BSP reduced benchmark rates by a cumulative 75 basis points (bps) after raising it by 175 bps in 2018 to combat high inflation at the time due to steep fuel prices. The result of the rate hikes however – and this was also seen by the BSP – was to impact on the growth momentum which in 2019 only hit 5.9 percent, ending seven years of above six-percent growth.
“The 175 bps rate hike salvo did its job of anchoring inflation expectations but may have had unintended consequence of sapping fading investment momentum. With government spending held back by the budget delay and private investment halted by the lagged effects of previous rate hikes, BSP attempted to quickly dial back the previous action by cutting 75 bps in 2019,” said Mapa.
Last Friday, BSP Governor Benjamin E. Diokno said they have both policy and fiscal space to further adjust interest rates. As a forward guidance, he has said that another 50 bps rate cut for 2019 – at least – could be expected.
The BSP currently has a 2.9 percent inflation forecast for 2020 and 2021.
The current manageable inflation environment of 2.5 percent average end-of-year which is within the two-four percent government target until 2022, as well as the financial system’s ample liquidity to back up the increased economic activity for a nation that keeps on growing, bodes well for the growth sustainability.
Diokno said they are still assessing the impact of the recent Taal volcanic eruption to both growth and inflation but initially, they see no significant impact on both indicators.
Based on the Monetary Board December 12 policy meeting minutes, the country’s inflation expectations remained well-anchored and in keeping the rates at four percent, the BSP thinks the balance of risks to the inflation outlook continue to be slightly on the upside for this year but it is more on the downside for 2021.
Upside risks to inflation includes the potential volatility in global oil prices because of geopolitical tensions in the Middle East, potential impact of the African Swine Fever outbreak and recent weather disturbances on domestic food prices. Downside risks are the continued trade conflicts between the US and China, and the slower global growth for 2020.
With the continued pickup in public spending this year to support economic activity, the Monetary Board believed the BSP has scope in as far as monetary policy is concerned amid benign inflation outlook and “firm” growth prospects.