BSP keeps interest rates unchanged with easing inflation

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Metro Manila (CNN Philippines, June 20) — The Bangko Sentral ng Pilipinas (BSP) kept key interest rates unchanged on Thursday as inflation appears to maintain its descent for the rest of the year.

BSP Governor Benjamin Diokno said the seven-man Monetary Board kept the key interest rate at 4.5 percent, steady from May's rate. Benchmark yields remain at the 4-5 percent range, which is used by banks and other financial firms as basis for pricing their own loan products.

"On balance, therefore, the Monetary Board believes that the manageable inflation outlook and firm domestic growth prospects support keeping monetary policy settings steady for the time being," Diokno said during the Thursday afternoon media briefing.

"A prudent pause allows the BSP to observe and assess the impact of prior monetary adjustments including the phased reduction in the reserve requirements to be completed by the end of July," he added.

In May, the central bank slashed the key rate by 25 basis points (bp), signaling the start of unwinding the series of rate hikes in 2018 which were back then meant to curb surging inflation. Policy makers also unveiled a three-stage reduction in the reserve requirements for universal and commercial banks, as well as the smaller thrift, rural, and cooperative lenders.

From a near-decade high of 6.7 percent in September and October, inflation has returned to the 2-4 percent target range set by the BSP. Prices of basic goods rose by 3.2 percent in May, albeit higher than April's three percent. 

Central bank officials have said that the inflation uptick last month was likely temporary, maintaining that the current average is still well within target at 3.6 percent.

The BSP's decision also follows the United States Federal Reserve's announcement of keeping its key rates on hold, which came with hints of possible rate cuts later this year as the U.S. economy reels from its worsening trade war with China. BSP Deputy Governor Diwa Guinigundo said the Fed's decision has been considered in the body's decision.

READ: Fed keeps interest rates steady, but signals potential rate cuts in 2019 as pressure mounts

Diokno has been branded as a "pro-growth" central banker, having crossed over to the BSP as Budget secretary and economic manager of President Rodrigo Duterte. The long-time economics professor and doctorate degree holder has defended his stance, saying he is ensuring stable prices to support "sustained, balanced, and inclusive" growth.

The BSP also expects even slower inflation over the next two years. Guinigundo said inflation is now seen averaging 2.7 percent this year, down from the previous estimate of 2.9 percent. For 2021, prices are seen rising by 3 percent from the May forecast of 3.1 percent.

"There was indeed a downtrend in actual inflation," Guinigundo said, noting that the latest projections factor in the decline in global oil prices, as well as the stronger peso versus the dollar in recent weeks.

Guinigundo, who will be retiring after 40 years of serving the BSP next month, said future rate cuts can be expected from the central bank.

"To paraphrase the governor, there is room for easing monetary policy because the view on inflation is quite optimistic, that is going to continue to be moderate," he said. "We need to show and establish the firmness of the downtrend of inflation down the road... We need to be more careful in terms of the timing as well as the pacing of easing monetary policy."

Diokno, however, flagged that the prolonged El Niño hitting parts of the country stands as the biggest risk to consumer prices. The state weather bureau has said that the dry spell could last until November.

The BSP's next rate-setting meeting is set for Aug. 8.