By Lee C. Chipongian
The central bank’s credibility, under Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno, is crucial to managing expectations with the market assuming another 50 to 75 basis points (bps) cut to interest rates this year to support growth.
“What is key here is proper signaling to the market so as not to catch them off guard with a move from left field,” said ING Bank senior economist Nicholas Mapa. “(Governor) Diokno recently sounded off on the importance of credibility stating that ‘without credibility, central banks resort to traditional aggressive tools to achieve the same result.’ Managing expectations in many instances may be just as integral to inflation targeting if the BSP has an effective ‘hold’ on the markets through its credibility, earned through effective communication,” he stressed, and that “policy adjustments are market moving and as such can affect the path and pace of the economy.”
Diokno, dubbed a “pro-growth” BSP chief after serving three presidents as budget official, has been pre-announcing the Monetary Board’s intentions about the policy rate and reduction in the reserve requirement ratio (RRR). He has said that when they decide it is time, they will ease interest rates first, followed by more RRR cuts, most likely by the third quarter this year.
Mapa said the Monetary Board’s next move, which the market expects is an easing of interest rates, is a “done deal with BSP looking to get the timing correctly.”
He noted that of the seven members of the Monetary Board, only Diokno is obviously “dovish” or inclined to lowering the rates further with a slowing inflation and a relatively less volatile peso. His leaning is also not a surprise because of his expansionary views.
Mapa said Diokno has already signalled a cut in the policy rate but timing is an issue.
“Asked about monetary policy in the wake of recent dovish comments from (US Federal Reserve) Fed Chairman Powell (who has signalled a rate cut by end-July), Diokno indicated that ‘we have already decided’ with the BSP looking for the proper timing,” the ING economist said.
Finance Secretary Carlos G. Dominguez III, the only cabinet member in the Monetary Board, has an “unknown” sentiment with regards to monetary policy actions, according to Mapa. Also undetermined were the opinions of two other Monetary Board members, former bank presidents Peter B. Favila and Antonio S. Abacan Jr., while former BSP deputy governor now in the Monetary Board, Juan De Zuniga Jr., is also silent on whether rates will be slashed further.