By PressOnePH Business

The Bangko Sentral ng Pilipinas (BSP) delivered on Thursday fresh monetary support to a slowing economy, cutting rates for the third time this year despite its own warnings that inflation was at risk of spiking again in 2020.

In a briefing, BSP Governor Benjamin Diokno said he and his peers at the Monetary Board decided to slash the overnight reverse repurchase rate, used by banks to price loans, by 25 basis points to 4 percent.

The latest decision is meant to lower bank lending rates and encourage consumers and investors to borrow, but with inflation risks seen gaining ground to 2020, the benefits of cheaper lending is unlikely to be enjoyed fully before prices rise and the BSP is prompted to act again.

“The Monetary Board’s decision is based on its assessment that price pressures have eased further since the previous meeting,” Diokno said.

“Latest baseline forecasts of the BSP continue to indicate that inflation is likely to settle within the lower half of the target band,” he added.

Indeed, BSP’s latest inflation forecasts were reduced a tad lower to 2.5% this year, and were maintained at 2.9% for 2020 and 2021. All forecasts fall within the government’s 2-4% target. Inflation averaged 3% as of August.

On top of this, Diokno noted of a “subdued” global economy that was taming price pressures here and abroad. The Philippine economy itself has lost momentum, notching a three-year low growth of 5.5% in the second quarter due to low public spending.

“Given these considerations, the Monetary Board believes that the benign inflation outlook provides room for a further reduction in the policy rate to support economic growth and reinforce market confidence,” the governor said.

But risks abound and inflation could accelerate faster than expected next year. For one, Diokno said consumer prices could rise due to an increase in global oil prices, which could translate to higher transport and utility costs.

The ongoing battle against the African swine fever would also lower pork supply and push up food prices, driving inflation. Both oil and food prices corner the big chunk of the basket of goods and services used to compute inflation.

“The Monetary Board also noted that the balance of risks to the inflation outlook have shifted toward the upside for 2020, while it is seen to tilt to the downside for 2021,” Diokno said.

Despite the inflation risks, Diokno followed through on his rate cut signals early in the month on Thursday. But the decision puts into question whether the full benefits of the rate cut will be felt by consumers before inflation threads higher again.  

While banks would enjoy lower BSP rates when they borrow from the central bank lending facilities tomorrow, consumers would not see their full benefits through lower loan rates immediately.

Previous BSP pronouncements put the full pass-through of BSP actions to bank lending rates at around 18 months from the decision, a period at which BSP is already forecasting “upside risks to inflation.”

Dovish

Since taking office last March, Diokno, former budget secretary of President Rodrigo Duterte, has overseen the slow reversal of BSP’s 175-bps hike in rates last year meant to combat a near decade-high inflation of 5.2%. Rates were reduced by 25 bps each in May and August.

Apart from trimming rates, the central bank had also reduced funds banks are required to keep as reserves by 200 basis points, a decision meant to make more money available for lending and support economic activity.

Slowing inflation has given BSP room to ease its policy and turn on growth-boosting mode this year, but easing inflation is partly caused by high base effects from 2018. BSP Assistant Governor Edna Villa, who was with Diokno during the briefing, recognized this.

“We expect inflation to remain on the downtrend,” Villa said.

That said, Villa assured the public that the next central bank decisions will be “data-dependent.” The central bank will again review its policy rates twice in the remainder of the year, on Nov. 14 and Dec. 12.

“Going forward, the BSP will continue to monitor emerging price and output developments to ensure that monetary policy settings remain consistent with price stability while being supportive of sustained non-inflationary economic growth over the medium term,” Diokno said.