Cooling inflation, growth raise chance of cut in benchmark rate, RRR: Reuters poll

Karen Lema, Reuters

Posted at May 06 2019 04:12 PM | Updated as of May 06 2019 09:52 PM

People buy rice at a market in Manila. Jonathan Cellona, ABS-CBN News

MANILA (UPDATE) - Inflation in the Philippines likely eased for a sixth straight month in April, giving the Bangko Sentral ng Pilipinas (BSP) leeway to ease monetary policy to support a slowing economy, a Reuters poll showed. 

Consumer prices have eased in recent months, edging closer to the low end of the central bank's 2-4 percent goal this year, while economic growth lost momentum in the first quarter due to a delay in approving the national budget.

If those estimates prove to be correct, the central bank would likely start reversing some of last year's policy tightening when it meets on Thursday either by cutting the benchmark interest rate or the reserve requirement ratio (RRR) or both, a majority of economists in the poll said.

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Eight of 12 economists in the poll predicted the central bank would deliver a quarter-point reduction in its benchmark interest rate on Thursday. 

Four of the eight further said the policy rate cut would also be accompanied by a 100 basis point reduction in the RRR, or the amount of cash that banks must hold as reserves, to ease liquidity conditions. 

Three expected the rate on the central bank's overnight repurchase facility and the RRR to be kept unchanged at 4.75 percent and 18 percent, respectively. One said the main rate would be kept steady but the RRR would be cut by 100 basis points. 

The Philippines remains one of Asia's fastest-growing economies, but policymakers had to grapple with soaring inflation last year that pushed the central bank to raise its benchmark interest rate by a total 175 basis points. 

BSP Governor Benjamin Diokno said last week cuts in both the main policy rate and the country's RRR for banks were "inevitable" this year as inflation has ebbed. 

Consumer price inflation is forecast to have eased to 3.0 percent in April, a 16-month low due largely to cheaper food and fuel costs, the poll showed, down from 3.3 percent in March.

Cooling inflation may have boosted domestic demand in the first quarter but it was probably not enough to counter the dampening effects on growth from a delay in the approval of the national budget and weak exports. 

Months of squabbling between the Senate and the House of Representatives delayed the president from signing this year's national budget, which officials say has hurt the government's ability to execute programmes and pursue infrastructure and
other projects. 

Economic growth probably slowed to 6.1 percent in the March quarter from a year earlier, the poll showed,down from 6.3 percent in the fourth quarter.

"We believe further deceleration in inflation provides the room for the BSP to start unwinding its aggressive round of monetary policy tightening", said Jiaxin Lu, economist at Continuum Economics.

In March, the government cut its 2019 growth target to 6-7 percent from 7-8 percent, reflecting the absence of a new budget and the impact of the U.S.-China trade dispute. Last year, the economy expanded 6.2 percent. 

Credit rating agency Standard & Poor's raised its long-term sovereign credit rating on the Philippines to BBB+ from BBB to reflect the country's strong economic growth trajectory.

Inflation data will be issued on May 7, ahead of the release of first quarter gross domestic product figures and the central bank's policy decision on May 9.