Thinking about monetary policy

PHILIPPINES - In Brief 07 Oct 2019 by Romeo Bernardo

---

In our quarterly report last August, we asked whether the key policy rate, the overnight RRP rate, will soon return to 3%, its level before the Monetary Board started tightening in May last year. In that tightening cycle, the overnight RRP rate rose by a total of 175bp, ending at 4.75%, before monetary authorities decided to pause (Table 1). Authorities then started reversing course in May this year, so far reducing the key policy rate by a cumulative 75bp to 4%.Are more cuts in store? The odds are certainly higher today than when we wrote our quarterly report for the following reasons:The US Federal Reserve delivered a second rate cut last month and markets appear to expect more cuts within the year.External headwinds from slowing global and regional economic growth seem to be getting stronger given geopolitical risks adversely affecting global trade, business sentiments, oil markets and the electronics industry, an important export sector for the Philippines. Growth forecasts for regional economies have been revised down[1] and data show September purchasing managers’ index for ASEAN falling below 50, signaling a contraction[2].Growth forecasts for the Philippines have likewise been downscaled, with analysts including multilateral agencies, expecting 2020 GDP growth to fall below government’s 6.5% low-end target. There are signs that domestic demand growth is starting to pick up, but the numbers we’ve seen, including for government spending (7% growth yoy in the July-August period vs. double digits in prior years), remains far from robust.Inflation expectations look firmly anchored at this time and the BSP forecast for 2020 inflation is at 2.9%, below the midpoint of...