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Policy rates cut as economy slows, inflation weakens further

Updated: May 11, 2019

In a span of four days, officials announced that headline inflation slowed down further to 3% in April, gross domestic product (GDP) grew by a dismal 5.6% in the first quarter due to budget delays, and key policy rates were cut by 25 basis points after a year of high interest rates.

Bangko Sentral ng Pilipinas (BSP) Governor and Monetary Board Chairman Benjamin Diokno announced the reduction in the overnight reverse repurchase (RRP) facility to 4.5% effective May 10, 2019 just a few hours after the weak GDP results were announced on Thursday, May 9, 2019.

The rates on the overnight lending and deposit facilities were correspondingly increased. The cuts were made exactly a year after the RRP rate was first raised to check inflation. The rate was raised by a total of 175 basis points in 2018 as inflation surged before tapering off towards the end of the year.

Headline inflation has been slowing down since December and is now back within the government's target range of 2% to 4% for 2019 and 2020.

Diokno said in a press conference that the Monetary Board’s decision to cut the RRP rate was 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% ± 1 percentage point for both 2019 and 2020, while inflation expectations have moderated further," he added.

He also said the Monetary Board considered 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.

The Philippine Statistics Authority (PSA) reported that the GDP, or the total value of the goods and services produced in the country, expanded by a dismal 5.6% in the first quarter, a new low under the Duterte administration.

This was, in fact, the lowest GDP growth in the last 16 quarters, according to Socioeconomic Planning Secretary Ernesto M. Pernia. The GDP measures economic activity.

In a joint statement, Pernia and the other economic managers blamed the delay in the passage of the 2019 National Budget for the weak growth. Aside from Pernia, the team is also composed of the Budget and Finance secretaries.

"The budget impasse in Congress during the first three months of the year set off a spending cutback, which, in turn, stifled economic activity," the economic team said.

"The Senate-House deadlock over the 2019 General Appropriations Bill forced the government to operate on a reenacted 2018 budget for the entire first quarter. This resulted in underspending of about P1 billion pesos per day, equivalent to P80-90 billion in disbursements for the first quarter of 2019," the team added.

The budget delay had compelled the Development Budget Coordination Committee (DBCC) to adjust in March 2019 the GDP growth target for the year from the original 7%-8% to the 6%-7% range.

To reach this target, the economy will need to expand by an average of 6.1% over the next three quarters.

"This target is still within reach, should the private sector sustain its current performance and government be able to jumpstart and speed up the implementation of its new programs and projects," the economic team said.

The reduction in the policy rates is expected to stimulate lending, boost demand, and lift the economy.

Diokno said, however, that the Monetary Board has observed that the global economic growth momentum has slowed down. Indications of slower growth in domestic liquidity and credit also require careful monitoring, he said.

He said the 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. (Ventures Cebu)

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