Low inflation boosts policy cut scenario

(Our inflation outlook) includes the bombing on Saudi Arabia. We don’t have any changes on oil assumptions

The outlook on inflation could prove lower than the assumed rate of 2.6 percent this year and this strengthens the case for another policy rate cut today, Thursday, when the Monetary Board meets to decide if any more adjustments are appropriate.

This was learned from Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno who, despite the geopolitical repercussions of the attack on Saudi Arabia oil production facilities, said the bulk of other economic assumptions built around the central bank’s policy rates have been kept intact.

According to him, the assumed full-year inflation of 2.6 percent had been kept unchanged for purposes of monetary policy crafting despite such shocks as the Saudi Arabia oil field disruption and the US-China trade tensions.

Year-to-September inflation average only 3 percent as the rate of change in prices steadily improved from 4.4 percent in January to only 1.7 percent as of August, based on BSP data.

Food inflation, with food accounting for more than half of the consumer price index from which headline inflation is derived, is seen moderating even lower in the coming months.

“(Our inflation outlook) includes the bombing on Saudi Arabia. We don’t have any changes on oil assumptions. Foreign exchange is still the same,” Diokno said at the sidelines of eCompareMo.com’s financial technology event dubbed Finovation 2019.

Also, the BSP chief said this year’s growth outlook had been kept unchanged at 6 to 7 percent in terms of the gross domestic product (GDP) to 7 percent growth despite the economic slowdown in the first half.

“Growth assumption is the same. We’re still going to hit 6 percent, the low end of the 6 to 7 percent target, so this is no change,” Diokno said.

As for the projected cut in the reserve requirement ratio (RRR) for banks, the BSP said they might execute a 100 basis-point cut sometime in the fourth quarter period.

He clarified the anticipated RRR reduction would be announced separately from the similarly cut in the rate at which the BSP borrows from or lends to banks in the immediate future. Diokno also said deposit reserves cut could be done in phases or implemented in just one go.