Low inflation helps smooth new Philippine governor’s transition

By BLOOMBERG

MANILA • After a bumpy start, the new Philippine central bank governor Benjamin Diokno (picture) will get help from a favourable economic backdrop as he eases into his job.

A former budget minister and proponent of fiscal stimulus to spur economic growth, Diokno’s surprise appointment last week jolted financial markets betting on a central bank insider to succeed governor Nestor Espenilla, who died of cancer.

Diokno, 70, is seen favouring low interest rates and a weaker peso. He told reporters last Friday that a slowdown in inflation provides scope to ease monetary policy after 175 basis points of interest-rate hikes in 2018, but the timing of a move will depend on what the data shows.

The new governor “inherits a much more favourable environment, which gives him a lot of policy space”, said Trinh Nguyen, senior economist for emerging Asia at Natixis Asia Ltd in Hong Kong.

Inflation returned to the central bank’s 2% to 4% target last month, giving Diokno and his fellow Monetary Board members room to ease policy.

The new governor has also signalled his desire to reduce the reserve requirement ratio for lenders, which is currently at 18%, the highest ratio in South- East Asia. Any policy move will be “data-dependent”, he said last Friday.

An emerging-market rout and soaring inflation took a toll on investor sentiment last year, pushing the peso down 5% against the dollar. The currency has recovered in 2019 as the US Federal Reserve pulled the brake on rate hikes and worries about twin deficits on the Philippine current account and budget subsided.

The local currency fell 1% against the dollar on March 5, the day after Diokno’s appointment was announced. He has taken steps to clarify past comments, saying his supposed bias for a weaker peso is overblown, which prompted it to recoup some losses.

It also helps that the Philippines has just passed the New Central Bank Act, which equips the monetary authority with bigger capital, stronger powers and wider functions, including the ability to issue its own debt.

“In pursuing policy continuity, let me also assure you that the Bangko Sentral ng Pilipinas will sustain its institutional independence, with the Monetary Board acting as a collegial body,” Diokno told reporters last Friday. — Bloomberg