BANGKO SENTRAL ng Pilipinas (BSP) Governor Benjamin E. Diokno said monetary authorities continue to view the inflation environment as stable over the next three years, a key consideration in the decision to reduce rates last week.
He added that the bank retains the option to reduce reserve requirements for banks, signalling that the BSP continues to look for ways to increase the financial system’s liquidity to facilitate the economic recovery.
“The (inflation) risks are tilted to the downside from 2020 to 2022,” Mr. Diokno said in a text message to BusinessWorld.
“Downside risks are the deeper impact of the coronavirus on domestic growth with medium (50%) probability and global growth with medium probability too (50%),” he added.
The BSP’s Monetary Board reduced rates by 50 basis points (bps) Thursday, bringing the overnight reverse repurchase, lending, and deposit rates to record lows of 2.25%, 2.75% and 1.75%, respectively. Mr. Diokno said the current inflation trend gave the BSP leeway to lower rates.
The fourth easing round, which brings rate reductions this year to 175 bps, confirmed the BSP’s accommodative direction in bringing down cost of borrowing and ensure liquidity to kick-start the economic recovery.
The central bank revised its average inflation outlook for 2020 to 2.3% from 2.2% while the 2021 forecast was raised slightly to 2.6% from 2.5%. Both outlooks are closer to the lower end of the 2-4% inflation target set by the BSP.
“Upside risks to inflation are global rice price increases, pending electricity rate and water rate increase, all with low (25%) probability,” he said.
Headline inflation in May settled at 2.1%, against the 2.2% recorded in April and the year-earlier 3.2%. This brought the year-to-date inflation average to 2.5%.
“(W)e’re confident that inflation will be benign for the next three years and in fact that is one of the basis for the policy cut…You know, inflation is the least of our worries,” Mr. Diokno told ABS-CBN News Channel Monday.
As restrictions on movement are eased, some commodities may see manageable upticks in prices as demand picks up, according to Security Bank Corp. Chief Economist Robert Dan J. Roces.
“Gradual demand recovery may be clustered mostly on essentials (primarily food and medicines) in the short to medium term as consumers opt to preserve cash, and thus other items may offset any increases,” he said in a text message.
Meanwhile, Mr. Diokno also said reserve requirement ratio (RRR) cuts are also still being looked at to boost liquidity during the crisis.
“Let me be very clear that the option to cut RRR remains on the table but we’re monitoring the liquidity in the system,” he said in an interview with ABS-CBN News Channel on Monday.
Mr. Diokno is authorized to cut up to 400 bps this year in bank RRR. So far, the reserve requirement for big banks has been reduced by 200 bps. — Luz Wendy T. Noble