BSP cuts key interest rate by 25 bps to 3.75 pct, likely to cut again in Q2 2020

The Philippine central bank, BSP, lowered its interest rate unexpected. The BSP cut its overnight reverse repurchase rate by 25 basis points to 3.75 percent. The central bank continues to be positive about domestic growth prospects. Strengthening public consumption and investment stimulated growth in the fourth quarter of 2019. High frequency indicators imply that economic conditions are rebounding, noted ANZ in a research report. For instance, credit growth picked up for two straight months to 10.9 percent year-on-year in December.

This positive assessment notwithstanding, BSP repeated that risks are skewed to the downside. External headwinds such as trade tensions and the 2019-nCoV outbreak are a primary concern. BSP Governor Benjamin Diokno stated that the coronavirus outbreak might subtract 0.3 percent from full year growth, manifesting through tourism and overseas worker remittances. These risks also form the basis for today’s rate cut.

The BSP expects inflation to come in at percent in 2020. This likely reflects higher food costs from crop damage, which drove up inflation in the past two months. Oil price have been volatile. After spiking in early January in the midst of geopolitical concerns, prices have dropped by almost USD 10/bbl on expectations of softer demand from Asia because of the 2019-nCoV outbreak. Nevertheless, inflation continues to be manageable and might stay with the target band of 2-4 percent.

“For now, we expect the BSP to undertake one additional 25bp cut this year, likely in Q2. However, a greater-than-expected impact from the coronavirus may extend the easing cycle further”, added ANZ.