BSP cuts overnight RRP rate by 25 bps to 4.50 pct

The Philippine central bank lowered its overnight RRP rate by 25 basis points to 4.50 percent today. Accordingly, the overall interest rate corridor was cut by a similar magnitude. The BSP also cut its inflation forecast for 2019 to 2.9 percent from 3 percent previously, reflecting lower-than-expected inflation outturns in the year and softer demand-pull pressures.

This reduction is important in that the revised forecast now lies below the midpoint of the inflation target band. In the meantime, forecast for next year was raised to 3.1 percent upon expectations of higher oil prices and an adjustment in domestic transport costs. The BSP maintained that risks to this year continue to be widely balanced. Risks of a prolonged El Niño effect and higher oil prices continue to be.

The economic growth decelerated to 5.6 percent in the first quarter, the softest rate in almost four years. Growth was impacted by the delayed enactment of the 2019 budget and a larger drag from net exports. While the BSP noted the effect of the delayed budget on near term growth, prospects for domestic demand were viewed to be strong underpinned by a “projected recovery in private consumption and continued implementation of the infrastructure program”.

Even if the BSP maintains that risks to 2019 inflation are balanced, comments around slower global growth momentum as well as tightening liquidity conditions imply that further rate cuts continue to be on the table. A further 50 basis point cuts are expected in the remainder of 2019, said ANZ in a research report.

“The Monetary Board will also be considering changes in the reserve requirement ratio at its meeting next week. We expect a 100bps reduction and a cumulatively cuts of more than 200bps in full year 2019”, added ANZ.