Philippine central bank cuts rates as growth falters, opens door for more easing

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08/08/2019 | 11:08 am
MANILA (Reuters) - The Philippine central bank cut its benchmark interest rate on Thursday and kept the door open for further easing to buttress the economy after growth slipped to its weakest in 17 quarters, hurt by tepid government spending and private sector investment.

The Bangko Sentral ng Pilipinas (BSP) reduced the rate on its overnight reverse repurchase facility <PHCBIR=ECI> by 25 basis points, its second this year, to 4.25%. The move was correctly predicted by all 10 economists in a Reuters poll.

The BSP left the reserve requirement ratio for banks at 16% following a 200 basis points phased reduction through July.

"The benign inflation outlook provides room for further reduction in the policy rate as a pre-emptive move against the risks associated with weakening global growth," BSP Governor Benjamin Diokno told a news conference.

Inflation is now expected to average 2.6% this year and 2.9% next year, the central bank said, down from its previous estimates of 2.7% and 3.0%, respectively. Both forecasts are well inside its 2%-4% target for both years.

The Southeast Asian nation's gross domestic product (GDP) grew 5.5% in the April-June period from a year earlier, the statistics agency said, missing the median forecast for 5.9% growth tipped in a Reuters survey. On a seasonally adjusted basis, the economy grew 1.4 percent, faster than the downwardly revised 0.6% gain in the previous quarter.

"This means that we will have to grow by an average of at least 6.4% in the second half of the year to reach the low end of the full-year growth target of 6-7% in 2019," Economic Planning Secretary Ernesto Pernia told a news conference earlier on Thursday.

Pernia attributed the continuing weak performance of the domestic economy to the delayed passage of the 2019 national budget and the slowdown in government spending.

The Philippines has targeted an economic expansion of 6-7% in 2019, 6.5-7.5% in 2020 and 7-8% in 2021 and 2022.

Growth could have risen by one percentage point more in the first and second quarters if the budget had been passed on time, Pernia said, adding the government is hopeful of achieving a 6-6.5% pace of expansion this year.

The Philippines remains one of the fastest growing economies in Asia, but rising downside risks, including simmering U.S.-Sino trade tensions, put this year's growth target at risk and would likely justify further policy easing, economists say.

FURTHER EASING

Economists widely expect the central bank will further reduce interest rates and banks' reserve requirements later this year as easing inflation gives policymakers more room to support growth.

"Further easing of local monetary policy remains possible in the coming months after weaker GDP data," said Michael Ricafort, an economist at RCBC in Manila.

Ricafort sees another cut of 25-50 bps by year-end, as well as a 100 basis point reduction in banks' reserve requirement from the current 16%.

The BSP raised rates by a total of 175 basis points last year to rein in inflation, which peaked at a near-decade high of 6.7% in September and October.

However, with inflation no longer a worry, the central bank began to unwind its tighter policy with a quarter-point rate cut in May, the first since October 2012, to shore up the economy against risks including simmering U.S.-Sino trade tensions.

Annual inflation eased to a two-year low of 2.4% in July, bringing year-to-date average inflation to 3.3%, comfortably within the central bank's 2%-4% percent target this year.

The Philippine central bank cut its key policy rates in step with the global monetary easing trend as financial markets and exports are buffeted by the U.S.-China trade war.

The U.S. Federal Reserve cut interest rates last week, amid slowing global growth. On Wednesday, central banks in New Zealand and India surprised markets with larger than expected rate cuts, while Thailand unexpectedly cut its benchmark for the first time since 2015.

The peso strengthened to 52.04 against the dollar from Wednesday's close of 52.32 after the policy decision, while the benchmark stock index <.PSI> ended 0.04% lower.

(Editing by Jacqueline Wong)

By Neil Jerome Morales and Enrico Dela Cruz

Thomson Reuters 2019
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