MANILA, Philippines (UPDATED) – The Bangko Sentral ng Pilipinas (BSP) loosened up the country’s monetary policy, as both inflation and economic growth slowed down.

The BSP’s Monetary Board on Thursday, May 9, cut the benchmark policy rate by 25 basis points (bps) to 4.5%. The interest rates on the overnight lending and deposit facilities were reduced accordingly.

This is the first rate cut under the leadership of BSP Governor Benjamin Diokno.

It comes after 5 rate hikes of up to 175 bps in 2018, to temper surging prices of goods.

Diokno said the decision is based on their outlook that inflation would be “manageable” and would stay within the target band of 2% to 4%.

Inflation in April was right on target at 3%.

Meanwhile, the country’s gross domestic product growth slowed down to a 4-year low at 5.6% in the 1st quarter of 2019.

Diokno said the Monetary Board noted the impact of the budget impasse on near-term economic activity.

The central bank chief said prospects for domestic demand “remain firm,” as household spending recovers and the government’s infrastructure programs continue.

The reserve repurchase ratio (RRR) – the amount banks must hold in their reserves – was held steady at 18%. Diokno said cutting the RRR is “on the table” and will be discussed next week.

Too soon?

Easing the interest rate creates a ripple effect across the economy. It generally means lower borrowing costs for consumers and would lead to people spending more.

While more spending in the economy ramps up the demand for goods and supports economic growth, it may also cause inflation to surge.

Diokno has been perceived to support growth-driving measures, as he was previously the government’s budget secretary, pushing for the infrastructure agenda.

Some economists previously noted that cutting the interest rates may be too soon.

Bank of the Philippine Islands’ lead economist Jun Neri previously said cutting the policy rate at this point was “premature,” as it may accelerate inflation.

Unionbank’s chief economist Carlo Asuncion also thinks the move may be “too early.”

“We still see the uncertainties in global oil prices. It may be 2018 all over again with unexpected high inflation,” Asuncion said.

“But the lower-than-expected 5.6% economic growth far outweighed all deciding factors or risks. Growth risks were given more weight in cutting the interest rate,” he added.

Meanwhile, Rizal Commercial Banking Corporation’s chief economist Michael Ricafort has a more positive outlook on the rate cut.

“This provides needed boost for the economy in terms of lower borrowing or financing costs that spur greater economic growth,” Ricafort said. – Rappler.com