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Philippines Cuts Interest Rates Further As Economy Slows

philippinescentralbank nov15 08aug19 lt

The Philippine central bank slashed the key interest rate on Thursday, citing a benign inflation outlook and slowing growth.

The Monetary Board of the Bangko Sentral ng Pilippinas, or BSP, decided to lower the overnight reverse repurchase facility rate by 25 basis points to 4.25 percent. The move was in line with economists' expectations.

"The Monetary Board believes that the benign inflation outlook provides room for a further reduction in the policy rate as a pre-emptive move against the risks associated with weakening global growth," the bank said.

The previous change in the rate was a surprise quarter-point reduction in May, which was the first since 2016, after the economy expanded at the weakest pace in four years in the first quarter.

The bank also reduced the reserve requirement for banks by 200 basis points spread across three instances from end-May to late July to 16 percent.

In November, the bank had raised its benchmark interest rate by 25 basis points to 4.75 percent.

The pace of growth slowed further in the second quarter, official data revealed earlier on Thursday.

Gross domestic product grew 5.5 percent in the three months to June after a 5.6 percent expansion in the first quarter. Economists had forecast 5.9 percent growth.

Inflation slowed to 2.4 percent, its lowest level in two years, in July, official data revealed earlier this week.

Citing its latest projections, the BSP said inflation is likely to settle within the inflation target of 3.0 percent ± 1 percentage point for 2019 up to 2021.

"The risks to the inflation outlook continue to be seen as broadly balanced for 2019 and 2020, while they are seen to tilt to the downside for 2021," the bank said.

While the potential adverse effects of a prolonged El Niño episode to inflation have subsided, weaker global economic prospects continue to temper the inflation outlook, the BSP added.

The central bank said the outlook for domestic growth remains firm on a possible recovery in household spending and the faster implementation of the government's infrastructure spending plans.

"We expect the BSP to cut policy rates again by 25 bps at the September meeting given previous comments from Governor [Benjamin] Diokno pointing to a total of 50 bps worth of rate cuts before the end of the year," ING economist Nicholas Mapa said.

"Furthermore, we expect the BSP to reduce reserve requirements (RRR) further in the 4Q after it completes its 2019 rate cut cycle to help infuse fresh liquidity into the market."

The trade war escalation between China and the U.S. is causing concerns of a severe global economic slowdown.

This was one among the major reasons why the Federal Reserve slashed its funds rate last week, the first such move since 2008.

Central banks across the world are busy following suit with those in New Zealand, India, and Thailand cutting their rates this week.

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