In May Bangko Sentral Ng Pilipinas (BSP) began to unwind last year's rate hikes that totaled 175 basis points by cutting the rate by 25 points. But the central bank then took what it described as a "prudent pause" in June to asses the impact of the rate cut and its phased 2 percentage point reduction in reserve requirements that was completed in late July.
But data for the second quarter of this year showed a continued deceleration in economic growth to the slowest pace since the first quarter of 2015 while inflation for July slowed further to 2.4 percent from 2.7 percent in June.
"The Monetary Board's decision is based on its assessment that price pressures have continued to ease since the previous meeting," BSP said, adding the benign outlook for inflation provided room for a further cut to the rate "as a pre-emptive move against the risks associated with weakening global growth."
BSP still expects inflation to settle within its target range of 3.0 percent, plus/minus 1 percentage point for 2019 to 2021 but said inflation expectations had moderated further and while the risks to its inflation outlook are broadly balanced for 2019 and 2020, they tilt to the downside for 2021.
In addition to lowering its benchmark rate, BSP also cut the rate on its overnight deposit and lending facilities to 3.75 percent and 4.75 percent, respectively.
The rate cut was widely expected after data earlier today showed the Philippines' gross domestic product decelerated to a lower-than-expected 5.5 percent annual rate in the second quarter from 5.6 percent in the first quarter and 6.3 percent in the fourth quarter of last year.
In addition, the central bank's governor, Benjamin Diokno, earlier this week told Bloomberg that he expects to cut the rate by another 50 basis points this year, with the timing of the cuts dependent on economic data.
Diokno also said he expects inflation to average 2.6 percent this year, down from an earlier forecast of 2.7 percent, and 2.9 percent in 2020, down from 3.0 percent previously expected.
In today's statement, BSP said the prospects for global economic activity were likely to remain weak amid sustained trade tensions and going forward it would continue to monitor price and output to ensure its policy stance is "appropriately supporting of sustained non-inflationary economic growth over the medium term."
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 4.25 percent. Accordingly, the interest rates on the overnight deposit and lending facilities were reduced to 3.75 percent and 4.75 percent, respectively.
The Monetary Board’s decision is based on its assessment that price pressures have continued to ease since the previous meeting. Latest baseline forecasts of the BSP indicate that inflation remains likely to settle within the inflation target of 3.0 percent ± 1 percentage point for 2019 up to 2021. Inflation expectations have also moderated further to levels consistent with the inflation target based on the BSP’s survey of private sector economists. Moreover, the risks to the inflation outlook continue to be seen as broadly balanced for 2019 and 2020, while they are seen to tilt to the downside for 2021. Weaker global economic prospects continue to temper the inflation outlook. The potential adverse effects of a prolonged El Niño episode to inflation have subsided.
The Monetary Board noted that prospects for global economic activity are likely to remain weak amid sustained trade tensions among major economies. Domestically, the outlook for growth continues to be firm on the back of a projected recovery in household spending and the accelerated implementation of the government’s infrastructure spending program, after the delay in expenditures due to the legislative impasse in the approval of the budget in January to April 2019.
On balance, therefore, the Monetary Board believes that the benign inflation outlook provides room for a further reduction in the policy rate as a pre-emptive move against the risks associated with weakening global growth. Going forward, the BSP will continue to monitor price and output conditions to ensure that monetary policy remains appropriately supportive of sustained non-inflationary economic growth over the medium term."
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