Philippine central bank cuts rates after first quarter growth pace slowest in four years

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05/09/2019 | 12:08 pm
MANILA (Reuters) - The Philippine central bank cut its benchmark interest rate on Thursday, on expectations inflation will ease after the economy grew at its slowest pace in four years in the first quarter.

The Bangko Sentral ng Pilipinas (BSP) cut the rate on its overnight reverse repurchase facility by 25 basis points to 4.50 percent, the first since October 2012, which was correctly predicted by eight of 12 economists in a Reuters poll.

"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," central bank Governor Benjamin Diokno told a news conference.

The Southeast Asian economy grew 5.6 percent in the first quarter from a year earlier, much weaker than the 6.1 percent forecast by economists and the previous quarter's 6.3 percent.

On a seasonally adjusted basis, the economy grew 1.0 percent from the previous quarter, far slower than the upwardly revised 1.8 percent in the fourth quarter.

The slowdown in one of Asia's fastest-growing economies was expected because of the delay in the approval of the national budget, which hurt the government's ability to execute programmes and pursue infrastructure and other projects.

The central bank maintained banks' reserve requirement ratio (RRR) at 18 percent, but Diokno said it would be discussed next week without elaborating.

Domestic demand should pick up in the coming months, the central bank said, helped by moderating inflation and continued implementation of the government's infrastructure programme.

Philippine President Rodrigo Duterte signed the 3.66 trillion peso ($70.3 billion) budget in April after months of squabbling between the upper and lower chambers of the house.

Inflation is expected to average 2.9 percent this year, the central bank said, down from its previous forecast of 3.0 percent. It projected average inflation of 3.1 percent next year, up from an earlier estimate of 3.0 percent due to anticipated rises in oil prices and transport fares.

Both forecasts were well inside the central bank's 2-4 percent target for both years.

The peso closed weaker at 52.30 against the U.S. dollar from Wednesday's close of 52.11 after the policy decision was announced, while the benchmark stock index ended down 2.2 percent at an eight-week low.

MORE EASING SEEN

Many economists believe the central bank will further reduce interest rates this year and deliver cuts in RRR as policymakers can afford to place greater emphasis on growth given subsiding inflationary risks.

"The growth outlook in the Philippines has dimmed somewhat. We believe a further cool down in inflationary pressures also provides the BSP with room to start unwinding its aggressive round of monetary policy tightening," said Jessie Lu, economist at Continuum Economics.

Lu expects three rate cuts this year totalling 75 bps, including Thursday's 25 bps cut, and 200 bps reduction in RRR.

To rein in red-hot inflation last year, the central bank raised rates by a total 175 basis points.

Economic Planning Secretary Ernesto Pernia said earlier on Thursday the economy needs to grow by an average 6.1 percent over the next three quarters to achieve the government's downwardly revised growth target of 6-7 percent this year.

Growth in government spending slowed to a near two-year low of 7.4 percent in the first quarter from 12.6 percent in the fourth quarter, the data showed. That outweighed the pick-up to 6.3 percent in domestic demand growth from 5.3 percent. For details, click on

(Graphic - Philippine economy snapshot: http://tmsnrt.rs/2nZqDWx)

(Additional reporting by Enrico Dela Cruz; Editing by Jacqueline Wong)

By Karen Lema and Neil Jerome Morales

Thomson Reuters 2019
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