March 5, 2019 / 9:27 AM / 5 months ago

Philippine may loosen policy grip under new chief

MANILA, March 5 (Reuters) - The appointment of Benjamin Diokno as Philippine central bank governor could spur a faster move to easier policy this year, with the former budget minister largely seen as pro-growth.

A day after Diokno was named by President Rodrigo Duterte as successor to Nestor Espenilla who died on Feb. 23 of cancer, the Philippine peso weakened sharply as cooling inflation also fuelled speculation of policy easing.

The central bank deputy governor said on Tuesday it was too early to talk about a possible reduction in policy rate or bank reserve requirements, but some economists expect the central bank will ease policy sooner rather than later.

Diokno has been part of Duterte’s economic team that has been running an expansionary budget to deliver on an ambitious $180 billion infrastructure revamp central to his promises to attract investment, create jobs and lift economic growth.

“Given the Duterte administration’s expansionary fiscal policy stance, this signals a bias for more monetary accommodation from the new governor,” Noelan Arbis, economist at HSBC, said in a note.

“This is not entirely unexpected. We have previously said that the BSP is likely to shift its focus on measures to support growth, as inflation normalises”, Arbis added.

Diokno assumes the position of central bank chief at a time when policymakers are trying to strike a balance between supporting the economy and defusing inflationary risks.

The Philippines remains one of Asia’s fastest growing economies, but policymakers had to grapple with soaring inflation last year that pushed the Bangko Sentral ng Pilipinas (BSP) to raise its benchmark interest rate by a total 175 basis points to 4.75 percent.

But easing food and fuel prices allowed inflation to gradually move away from a near-decade peak of 6.7 percent in September and October last year to return to the central bank’s 2-4 percent target in February.

“Diokno’s relaxed attitude to fiscal deficits as budget secretary suggests he will be dovish as governor,” Capital Economics said in a note.

The government overshot its budget deficit target last year when the gap widened to 3.2 percent of GDP from a 3.0 percent target. The budget gap ceiling this year is 3.2 percent of GDP.

All eyes will be on Diokno when he chairs his first policy meeting on March 21.

“What we are sure of is his background, his past statements on being dovish, favouring lower interest rates. As such, that is negative for the peso,” said a currency trader who did not want to be named.

The peso weakened by 0.7 percent versus the dollar, losing the most versus its regional peers on Tuesday.

Diokno did not respond to Reuters’ request for comments.


Diokno’s appointment came as a surprise to many as he was not among those tipped to get the highest post at the BSP. He is seen to be close to the government but is expected to uphold the autonomy of the central bank.

“Bearing in mind that the president has sought to distance himself from the country’s day-to-day fiscal and economic management, and has largely lived up to that promise, we do not see central bank independence as an issue with the appointment of Secretary Diokno as BSP governor,” said Christian de Guzman, lead sovereign analyst for the Philippines at Moody’s.

Presidential spokesman Salvador Panelo maintained that Diokno, an economist by training, was the right man for the job describing him as a person with “integrity, competence and expertise”.

Diokno served in the budget ministry under three presidents. He has a master’s degree in public administration and master’s degree in economics from the University of the Philippines, and a doctorate in economics from the Maxwell School of Citizenship and Public Affairs, Syracuse University in New York.

The former budget minister will complete the remainder of Espenilla’s six year term which will end in 2023.

The Bankers’ Association of the Philippines welcomed the appointment, saying Diokno’s “reformist brand of leadership” will ensure that reforms continue in the banking industry. (Writing by Karen Lema Editing by Jacqueline Wong)

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