THE Bangko Sentral ng Pilipinas (BSP) on Thursday eased its monetary-policy stance with a main policy rate cut, following an assessment of a further decline of both inflation and growth rates in recent months.

A 25-basis-point cut to its overnight reverse repurchase was made at its monetary-policy meeting, effective Friday, May 10—as broadly called for by markets for this meeting. The interest rates on the overnight lending and deposit facilities were reduced accordingly.

BSP Governor Benjamin Diokno told reporters that their decision to cut after several months of unchanged monetary-policy stance and aggressive rate hikes in 2018 was based on their assessment that the inflation outlook continues to be manageable, with easing price pressures owing to the decline in food prices and improved supply conditions.

Inflation, according to BSP Deputy Governor Diwa Guinigundo, is projected to fall further than earlier expected for this year—with their forecast now at 2.9 percent, from the earlier 3-percent forecast about two months ago.

The deputy governor said the reduction in their inflation forecast was based on the lower actual monthly inflation in the first four months of 2019, the lower growth for the year, lower cash supply growth as well as the lower global growth for the year.

For next year, however, their inflation projection was scaled upward to 3.1 percent from the earlier 3-percent forecast—which Guinigundo attributed to increases in global oil prices and adjustments in jeepney fares.

Right policy point

BSP officials said the decision on Thursday was a made in a “right policy point” environment, with considerations to the country’s disappointing growth numbers in the first quarter of the year—which was announced earlier in the day.

“In deciding the stance of monetary policy, the Monetary Board noted 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,” Diokno said, adding that the slower growth in domestic liquidity and credit require “careful monitoring”

Growth for the first quarter of the year, as announced by the Philippine Statistics Authority (PSA) on Thursday, slowed to 5.6 percent—the lowest growth for the country in four years. Government officials blamed this on the budget delay.

While a rate cut is known to be supportive of an economy’s growth prospects, BSP officials said their decision on Monday is “independent” of the government’s budget issues and that the lower interest rate’s ability to support local growth is more of a “consequence” of their decision rather than the actual goal of the cut.

Asked if the BSP is prepared to continue cutting rates should inflation continue to fall and growth remains to be weak in the coming months, Diokno said: “We will continue to be data-dependent and we will review from time to time what the current situation is and what is the prognosis for the future not only domestically but also globally.”

Guinigundo also commented on the future of monetary policy: “Anything can happen, so the conduct of monetary policy will have to be done in a careful, very deliberate way. Don’t expect it to be very sharp, but it is going to be gradual and it is going to be data dependent.”

RRR next?

Asked about their decision to cut the reserve requirement ratio (RRR) Diokno said there is no decision from the Monetary Board yet, that it is still on the table and that it will be discussed by the Monetary Board next week.

Several economists have been campaigning for a cut in the BSP’s RRR, especially after inflation had slowed to within target of 2 to 4 percent this year.

One of the latest economists to talk about the country’s RRR is Philippine National Bank (PNB) economist Jun Trinidad, saying the timing for a cut is appropriate for this year.

Well, you might say what about next year, medium term. Yes, they can wait. It [will] not necessarily be like an El Niño impact on liquidity, but the point there is that next year you may not see this benign inflation situation if the economy continues to grow.” With “external macro risks…addressed hopefully soon, [and] the US-China trade conflict nearing its conclusion, then inflation may not be as slow as what we are enjoying,” he added.

Latest data from the BSP showed domestic liquidity—broadly measured as M3—grew only by 4.2 percent in March this year, significantly slower than the 7.1-percent expansion rate in the previous month.

A growing cash supply is often beneficial for an expanding economy such as the Philippines, as it provides fuel to the productive sectors of the country.

However, an excessively slow growth in M3 could be detrimental to the country’s overall growth, especially if it is not enough to fuel the productive activities in the economy.