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Bangko Sentral keeps interest rates steady, cuts inflation forecasts

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) on Thursday, June 20, kept interest rates unchanged, citing "manageable" inflation as it also lowered its inflation forecasts for 2019 and 2020.

The BSP's Monetary Board maintained the interest rate on the overnight reverse repurchase facility at 4.5%. The interest rates on the overnight lending and deposit facilities were also held steady.

The BSP now expects inflation in 2019 to average at 2.7% from the previous forecast of 2.9%. Inflation in 2020, meanwhile, is projected at 3% from the previous outlook of 3.1%. Both are within the government's target range of 2% to 4%.

The lower inflation forecasts are due to the decline in global oil prices and the strengthening of the Philippine peso, according to BSP Deputy Governor Diwa Guinigundo.

"The Monetary Board believes that the manageable inflation outlook and firm domestic growth prospects support keeping monetary policy settings steady for the time being," said the central bank in a statement.

"While real sector activity moderated in the 1st quarter of the year, overall domestic economic activity is likely to remain firm, supported by a projected recovery in household spending and the continued implementation of the government's infrastructure spending program."

The BSP added that "weaker global economic prospects amid a possible easing in global demand and increased trade tensions continue to temper the inflation outlook."

'Prudent pause'

Inflation had inched up to 3.2% in May after 6 straight months of slowdowns, though still within target. El Niño, according to the National Economic and Development Authority, drove the uptick as it caused agricultural losses.

"The potential adverse effects of a prolonged El Nino episode remain a key upside risk to inflation," said the BSP.

Also in May, the BSP had trimmed interest rates by 25 basis points to 4.5%. While trimming interest rates lessens borrowing costs, it also puts an upward pressure on inflation.

The BSP is also cutting the reserve requirement ratio (RRR) – the amount banks need to hold in their reserves – by 200 basis points to 16%. The RRR cut, which is being done in 3 tranches, will be completed by the end of July.

With this move, banks would have more money to lend to consumers, which then encourages spending in the economy.

"A prudent pause allows the BSP to observe and assess the impact of prior monetary adjustments including the phased reduction in the reserve requirements," the central bank said.

"Going forward, the BSP will continue to monitor emerging price and output conditions to ensure that monetary policy remains in line with the BSP's price stability objective while being supportive of economic growth." (READ: EXPLAINER: Why is the role of Bangko Sentral governor important?– Rappler.com