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The Philippine economy is likely to recover in the second half of the year, allowing the central bank to differentiate its policy from peers that are also cutting interest rates, a deputy governor said.
While most other economies are slowing, growth in the Philippines is set to pick up as government spending ramps up after a budget standoff was resolved in April, Francis Dakila said in an interview Monday in Manila, his first with foreign media since taking office in July.
“I want to differentiate the Philippines compared to other economies on easing cycle,” he said. In many other countries, “their economies are slowing down. In the Philippines what we had is slower-than-expected growth, but there’s an identifiable reason for that, which is the budget delay.”
A global slowdown and the U.S.-China trade war have taken a toll on emerging Asia, where many countries depend on exports to drive growth. Central banks across the region have taken advantage of the benign inflation environment to ease monetary policy, including the Bangko Sentral ng Pilipinas, which has cut its benchmark interest rate by 50 basis points so far this year.
Dakila described the rate cuts as a process of “normalization” to undo some of last year’s tightening, when the BSP raised rates by 175 basis points.
The four-month delay in passing the budget dragged Philippine growth to 5.5% in the second quarter, its slowest pace in more than four years. With the impasse now resolved, government spending is expected to accelerate in the second half of the year.
“Indications are that for the second half of the year, growth numbers would be better,” Dakila said.
Recovering domestic growth means the central bank might not have to provide too much monetary support.
“A 25-basis-point key rate cut for the rest of the year would be enough to support the economy,” said Nicholas Mapa, a senior economist at ING Groep NV in Manila. “That also leaves the central bank space to cut further in 2020 if all hell breaks loose.”
Policy makers next meet on interest rates Sept. 26. Governor Benjamin Diokno has promised another quarter-point cut by the end of the year, as well as continued reductions in the proportion of deposits banks must hold in reserve, a step designed to push more money into the economy.
“Let’s leave it at the forward guidance of the governor,” Dakila said. “I wouldn’t characterize the economy as slowing down. So you can think of that as a signal.”
Dakila, 59, became deputy governor in charge of monetary policy when Diwa Guinigundo retired in July. A former assistant governor, Dakila has been at the BSP for 23 years and was part of the team that prepared the bank for its shift to an inflation-targeting regime in 2002.
The deputy governor said inflation for the rest of the year will likely come in below the bank’s 2%-4% target, partly due to base effects and lower oil and rice prices. Inflation will remain within the target range throughout 2020, he said.
Data due Thursday will likely show consumer prices rose 1.8% in August, according to a Bloomberg survey of economists. That would be the first reading below 2% in nearly three years.
Other points Dakila made in the interview:
The central bank remains on track to cut banks’ reserve requirement ratio to below 10% by 2023 from 16% now. Further reductions will depend on how low and stable inflation is and whether banks are using funds from previous RRR cuts to boost lending to productive industriesBSP aims to issue its own securities in the second quarter of 2020 as a tool to mop up excess liquidity in the financial system, allowing the bank to better influence market interest rates. It’s considering issuing securities with tenors of one month to one year, with the frequency of sales depending on the money supply
(Updates with economist’s comment in ninth paragraph)
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