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Philippine domestic economy remains firm in the medium term – BSP

By Riza Lozada 

The Bangko Sentral Ng Pilipinas (BSP) has expressed optimism that the domestic economy will remain firm in the medium term, this despite the spread of the COVID 19 across the region, with the resilient domestic demand and public construction spending fuelling growth. 

Inflation outlook, however, would likely tilt on the upside in 2020, the Bsp said citing factors of potential upward pressures on food prices due to the African Swine Fever outbreak and the tighter international supply of rice. The threat of possible eruption of Taal Volcano also posing burden to the economy, it added. 

The Bsp forecast “a broadly steady path of inflation for 2020 and 2021,” according to the latest meeting of its highest policy-making body, the Monetary Board’s (MB). 

The Monetary board announced in February this year its decision to cut policy interest rates remarking that this was based on its assessment of a manageable inflation environment. 

Further, the Bsp reported that, “latest baseline forecasts indicate a 

broadly steady path of inflation for 2020 and 2021, with average inflation remaining within the target band of 3.0 percent ± 1.0 percentage point.” 

The domestic economy will remain firm depending on the timely passage of the fiscal budget to spur public construction spending. Domestic demand will also contribute in the medium term to boost the economy. 

“Prospects for the domestic economy remain firm over the medium term, supported by resilient domestic demand, particularly as public construction is expected to continue to recover with the timely passage of the 2020 fiscal budget,” the MB reported. 

The Bsp cited also that economic activities that are tourism dependent could likely be affected with the recent spread of COVID-19 across the region. 

According to the Bsp report, the recent policy interest rate cuts were undertaken “to support market confidence.” 

‘The MB agreed that the manageable inflation environment allowed the BSP room for a preemptive reduction in the policy rate to support market confidence. While recent demand indicators still point to a firm outlook for the domestic economy, the Monetary Board believes that a policy rate cut would provide additional policy support to ward off the potential spillovers associated with increased external headwinds,’’ the Bsp reported. 

The Monetary Board reduced the overnight RRP borrowing rate by 25 basis points (bps) to 3.75 percent and reduced the current overnight deposit and overnight lending rates by 25 bps to 3.25 percent and 4.25 percent, respectively. 

Average headline inflation for 2019 was registered at 2.5 percent, well within the National Government’s 2-4 percent target range for the year and lower than the 5.2 percent recorded in 2018. Meanwhile, year-on-year headline inflation increased further in December 2019, confirming that inflation has bottomed out in September-October 2019. Price pressures came mainly from higher food prices linked to weather-related supply disruptions as well as rising oil prices in the international market. 

The Bsp included in its report that the domestic manufacturing production will continue to exhibit positive momentum in the near term with the December 2019 composite purchasing managers’ index (PMI) at 54.0 and remained above the 50-point expansion threshold. Car sales for commercial and passenger purposes also grew by 10.3 percent year-on-year in November 2019 and electricity sale went up by 4.3 percent year-on-year in November 2019 owing to the higher energy sales from the residential, commercial and industrial sectors, the Bsp said. 

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