News Article

Duterte’s new central bank chief signals potential rate cut

Diokno vows to maintain independence while analysts expect looser policy

MANILA — The Philippines’ new central bank governor Benjamin Diokno on Friday signaled a potential interest cut if inflation continues to decelerate and return to target this year.

“Given the decelerating inflation in the Philippines, there’s an opportunity for monetary easing but as I’ve said, that would be dependent on the data that will be given to us by our technical staff who are world class,” Diokno told reporters in his first official news conference as Bangko Sentral ng Pilipinas governor.

“We have to be more careful. The important thing is really timing,” Diokno said.

President Rodrigo Duterte picked Diokno to replace the late Gov. Nestor Espenilla, who died last month after a yearlong battle with cancer. His choice bucked the tradition of appointing career central bankers to ensure continuity and preserve the independence of the central bank, which is considered one of the country’s most professional institutions.

Diokno taught economics at the University of the Philippines and served as budget secretary under Duterte and former President Joseph Estrada. He has also worked as budget undersecretary to former President Corazon Aquino and advised the Cambodian government on fiscal policy.

The BSP hiked interest rates five times last year to its highest level in a decade in order to tame consumer prices, which had risen at their fastest pace in nine years. The pressure has now started to ease. In February, inflation fell to its lowest level in a year and came within the BSP’s target range of 2%-4% for the first time in as many months.

Market analysts see Diokno favoring a looser monetary policy. As President Rodrigo Duterte’s budget chief, he favored a weaker peso to boost remittances and receipts from the business process outsourcing industry.

While he was budget secretary, Diokno raised the country’s deficit ceiling to 3% of the economy from 2% to ramp up infrastructure spending. Last year, the country’s fiscal deficit breached the government’s cap for the first time in nine years after the government overspent on infrastructure and personnel salaries.

A rate cut would help reduce financing costs of Duterte’s “Build, build, build” program, which aims to spend over 8 trillion pesos on roads, bridges and airports by 2022.

Diokno, however, sought to allay concerns that his ties with Duterte would compromise the independence of the central bank. “In pursuing policy continuity, let me also assure you that the BSP will sustain its institutional independence,” he said.

The new governor will lead his first policy meeting on March 21, but analysts expect a cut in the bank’s overnight reverse repurchase rate to happen much later.

“If it’s the RRP policy rate, a cut only seems justified if monthly inflation falls below 2%. This can happen in 3Q2019,” said Emilio Neri, lead economist at the Bank of the Philippine Islands.

“If they are more conservative and look at full year inflation, an RRP cut doesn’t seem justified this year as 2019 is unlikely to fall below 2%,” he added.

However, a reduction in the reserve requirements for banks could happen as early as June and could “theoretically” cut them and align the country’s rates with the rest of ASEAN. At 18%, the Philippines has one of the highest reserve requirements in the world.

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