March 22, 2019
2019 inflation forecast trimmed to 3.0% from 3.1%, at midpoint of 2.0-4.0% target
MONETARY authorities on Thursday decided to keep key interest rates unchanged for the third time since December, noting that inflation is expected to settle within target this year and the next amid firm domestic activity.
The Bangko Sentral ng Pilipinas’ (BSP) overnight borrowing, lending and deposit rates will remain at 4.75 percent, 5.25 percent and 4.25 percent, respectively, following the Monetary Board’s second policy meeting for 2019.
“The … decision is based on its assessment that prevailing monetary policy settings remain appropriate,” central bank Governor Benjamin Diokno said during a press briefing.
He noted that latest baseline forecasts showed inflation settling within the 2.0-4.0 percent target for 2019-2020 “while inflation expectations continue to stabilize within the target band.”
“Inflation pressures have eased further since the previous monetary policy meeting, reflecting mainly the decline in food prices amid improved supply conditions,” Diokno added.
Central bank Deputy Governor Diwa Guinigundo announced that the Monetary Board had also cut its 2019 inflation forecast to 3.0 percent from 3.1 percent. The 2020 projection was retained at 3.0 percent.
“The major reason is the February actual inflation, which came in at 3.8 percent, a little lower compared to forecast of around 4 percent,” he said.
Other factors seen driving inflation down, Guinigundo added, are lower Dubai crude oil prices, negative base effects, a decline in world non-oil imports growth and some mitigation coming from the impact of the Rice Tariffication Act, which will take effect next month.
Diokno said “risks to the inflation outlook remained broadly balanced for 2019 even as it observed that further risks could emerge from [a] prolonged El Niño and higher-than-expected increases in global oil and food prices.”
He added that for next year, the risks lean toward the downside as tighter global financial conditions and geopolitical issues are expected to temper global economic activity and potential upward pressures on commodity prices.
Meanwhile, a projected recovery in household spending and the continued implementation of the government’s infrastructure program will support firm domestic activity.
“However, there are risks to economic growth in 2019 if the current budget impasse in Congress is not resolved soon,” Diokno said.
Economic managers last week cut the economic growth targets for this year and the next to to 6.0-7.0 and 6.7-7.5 percent, respectively, from 7.0-8.0 percent previously, citing the budget impasse, an ongoing El Niño and the US-China trade war.
The National Economic and Development Authority has warned that 2019 growth could slow to as low as 4.2-4.9 percent, from last year’s 6.2 percent, if the government was forced to operate on a reenacted 2018 budget.
“Given these considerations, the Monetary Board is of the view that the within-target inflation outlook and firm domestic growth support keeping monetary policy settings steady at this time,” Diokno said.
“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,” he added.
Policy reversal expected
Reacting to the Monetary Board decision, analysts said the continued pause strengthened views of a policy reversal going forward.
Alex Holmes, Asia economist for Capital Economics, believes interest rate cuts are now looking increasingly likely.
“We are expecting the first cut at the BSP’s next meeting in May,” he said.
Holmes also claimed that another reason for interest rate cuts was the worsening outlook for the economy.
Fourth quarter 2018 growth of 6.1 percent undershot expectation and the full-year result of 6.2 percent was the weakest in three years, he pointed out.
“With exports set to weaken on the back of sluggish global growth and the lagged impact of last year’s rate hikes likely to weigh on activity, a rebound is unlikely,” the
ING Bank Manila senior economist Nicholas Antonio Mapa, meanwhile, said the central bank remained data-dependent and could await further signs that inflation would settle within target.
“BSP’s inflation forecasts validate that the BSP is likely done with its tightening cycle, with a policy reversal in sight given slowing growth momentum, a dovish Fed and inflation back within target,” he added.
Sanjay Mathur of ANZ Research, for his part, said the BSP was progressively becoming comfortable with the evolving inflation scenario.
“We concur with this comfort. Our view is that the ongoing correction in inflation has opened the door to an easing cycle,” he added.|
ANZ Research expects a first rate cut of 25 basis points to be delivered in May when headline inflation would have moved closer to the mid-point of the central bank’s 2.0-4.0 percent target.
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