The rate cut by Bangko Sentral Ng Pilipinas (BSP) was widely expected by investors following recent statements by its governor, the steady decline of inflation to within BSP's target range and the slowest economic growth in four years.
The cut begins to reverse last year's 175 point rate increase between May and November after the peso weakened to record lows in response to U.S. policy tightening, helping push up inflation to a 10-year high, with prices boosted further by new taxes and food supply bottlenecks.
But inflation has now decelerated six months in a row to 3.0 percent in April from 6.7 percent in October and BSP confirmed it expects inflation to settle within its target range of 3.0 percent, plus/minus 1 percentage point, in both 2019 and 2020 and inflation expectations had eased further.
BSP said the risks to its inflation outlook in 2019 remained broadly balanced between a prolonged El Nino episode and higher-than-expected oil prices.
For 2020, the risks continued to lead to the downside as weaker global growth could temper a rise in commodity pries.
The Philippine economy slowed gradually during 2018 and continued to decelerate in the first quarter of this year.
The Philippine gross domestic product grew an annual 5.6 percent in the first quarter of 2019, down from 6.3 percent in the previous quarter and the weakest since first quarter 2015, hit by lower exports and parliament's delay in passing the government's 2019 budget until April.
The monetary board "noted" the impact of the budget delays on economic activity, but was of the view that domestic demand remains firm and will be supported by a recovery in spending and the continued implementation of the government's infrastructure program amid slower global growth.
Today's statement by BSP's monetary board does not mention any decision about the bank's reserve requirement but local press reports Governor Benjamin Diokno told reporters after the policy decision a proposal to lower the reserve ratio will be discussed next week.
Prior to raising its rates last year, BSP had lowered the reserve ratio to the current 18.0 percent and since taking over in March Diokno has said he would like to cut it again as it remains the highest in Asia.
After falling from January through September last year, the Philippine peso has firmed slightly this year and was trading at 52.3 to the U.S. dollar after the rate cut, up 0.6 percent this year.
Bangko Sentral Ng Pilipinas released the following statement:
"At its meeting on monetary policy today, the Monetary Board decided to reduce the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 25 basis points to 4.5 percent, effective on Friday, 10 May 2019. The interest rates on the overnight lending and deposit facilities were reduced accordingly.
The Monetary Board’s decision is based on its assessment that the inflation outlook continues to be manageable, with easing price pressures owing to the decline in food prices amid improved supply conditions. Latest baseline forecasts indicate that inflation remains likely to settle within the target range of 3.0 percent ± 1.0 percentage point for both 2019 and 2020, while inflation expectations have moderated further.
In deciding on the stance of monetary policy, the Monetary Board noted the impact of the budget delays on near-term economic activity, but took the view that the prospects for domestic demand remain firm, to be supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure program. In addition, the Monetary Board observed that the global economic growth momentum has slowed down in 2019. Meanwhile, indications of slower growth in domestic liquidity and credit require careful monitoring.
At the same time, the Monetary Board also noted that the risks to the inflation outlook remain broadly balanced for 2019 amid risks of a prolonged El Niño episode and higher-than-expected increases in global oil prices. For 2020, the risks continue to lean toward the downside as weaker global economic activity could temper commodity price pressures.
Looking ahead, the BSP will continue to monitor developments affecting the inflation outlook to ensure that the monetary policy stance remains consistent with its price stability objective."
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