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BSP eyes ‘deeper’ policy rate cuts

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THE central bank is looking at a “deeper cut” in interest rates to help cushion the economy from the impact of a “once-in-a-lifetime crisis” caused by the coronavirus disease 2019 (COVID-19) pandemic, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said ahead of a policy meeting next month.

He also signaled another cut in the amount of cash that banks need to hold as reserves to boost liquidity in the financial system.

“While BSP has cut the policy rate by 150 bps (basis points) since I assumed office last year, the Philippines is now faced with a once-in-a-lifetime crisis. It is now clear that reverting to where we were in 2018 — policy rate at 3.0% — is no longer an appropriate policy goal,” Mr. Diokno said in a text message to reporters on Sunday.

“A deeper cut is warranted in response to the expected sharp economic slowdown,” he said, noting that inflation is likely to settle closer to the lower end of the BSP’s 2-4% target this year.

The policy-setting Monetary Board (MB) has cut rates by a total of 150 bps since 2019, almost completely unwinding the 175 bps in hikes it implemented in 2018 amid multi-year high inflation.

Its latest move was 50-bp reduction on March 19, which brought the overnight reverse repurchase (RRP) rate — or the key policy rate — to 3.25% and overnight lending and deposit rates to 3.75% and 2.75%, respectively, in a bid to shield the economy from the virus fallout.

Headline inflation eased to 2.5% in March coming from the 2.6% in February and the 3.3% in the same month in 2019, mainly on the back of falling oil prices amid low demand due to COVID-19. This brought the year-to-date average to 2.7%, above the 2.2% expected by the BSP for 2020.

The Monetary Board will meet to discuss policy anew on May 21.

While noting that monetary policy works with a lag and that they will remain “data dependent,” Mr. Diokno said governments worldwide need to ensure a “soft landing” for their economies in the aftermath of the pandemic.

“The monetary authorities’ job, in coordination with fiscal authorities, is to manage a ‘soft’ landing and ensure that economic takeoff begins quickly once the pandemic fades,” he said.

“These new realities call for bolder but appropriate moves on the part of the BSP. The challenge is to cushion the impact of the economic slowdown on people, firms and the financial system,” Mr. Diokno noted.

The central bank chief added that they will cut lenders’ reserve requirement ratio (RRR) further following the 200-bp reduction in universal and commercial banks’ RRR earlier this month as they seek to boost liquidity to support economic activity.

The Monetary Board last month authorized Mr. Diokno to cut RRR by a maximum of 400 bps for the year, with potential cuts in the reserve requirements for other banks and nonbank financial institutions also to be explored.

“[T]he additional 200 bps cut is forthcoming based on available data, the needs of the economy, and the utilization of the additional liquidity,” he said.

Mr. Diokno earlier said the 200-bp cut freed up some P180-200 billion in liquidity.

The reserve ratios of thrift and rural banks are at four percent and three percent, respectively. However, the minimum liquidity ratio for stand-alone thrift, rural and cooperative banks was cut by 400 bps last week to 16% until end-2020 to boost their buffers amid the disruptions caused by the pandemic.

Before the COVID-19 outbreak, Mr. Diokno had vowed to reduce big banks’ RRR to the single-digit level by the end of his term in 2023.

ECONOMIC RECOVERY
Analysts said a more aggressive reduction in both benchmark interest rates and banks’ RRR will help ensure the country’s recovery after the crisis.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said further monetary easing will be in line with aggressive moves by central banks worldwide amid the pandemic.

“There is no better time than now to further cut interest rates and RRR to also complement the record programs versus COVID-19 to better deal with the economic losses especially in providing aid to vulnerable sectors as well as to prepare the economy for a rebound,” Mr. Ricafort said in a text message.

Security Bank Corp. Chief Economist Robert Dan J. Roces said Mr. Diokno’s signal is a “proactive stance” amid easing inflation that also factors in the transmission lags of monetary policy.

“[I]nflationary tendencies from cuts may be absent on the back of low oil prices which may offset any price repercussions,” Mr. Roces said in a text message. “[W]e can hit the ground running in terms of recovery after ensuring that the economy is adequately capitalized.”

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said lower interest rates will help the economy during this crisis even as he warned that this could take a toll on the peso, noting that adjustments can wait until a “soft landing” is reached.

“The peso has been attractive because of its spread between inflation and the existing policy rate. If the RRP is further cut, the peso may not be the same as it is perceived by the market now,” Mr. Asuncion said in a text message.

“[The] BSP has the careful task of continuing to smoothen the volatility of the peso after further rate cuts,” he said. “It’s a difficult balancing act. We may win or lose, but we do not have many policy choices at this point.”

Finance Secretary Carlos G. Dominguez III said last week the country’s gross domestic product (GDP) will likely post flat growth or even shrink by as much as one percent this year, as economic activities in Luzon remain at a standstill due to the Luzon-wide enhanced community quarantine (ECQ) that will last until April 30.

The estimated 1% contraction in GDP is lower than -0.6% to 4.3% growth range seen by the National Economic and Development Authority (NEDA) prior to the extension of the one-month lockdown.

NEDA last month said the low end of its growth estimate for this year, a contraction of 0.6%, is “still too high” if the ECQ is extended beyond one month “or if the spread of COVID-19 is unabated even after the ECQ.”

This compares to the 5.9% GDP expansion in 2019 and the 6.5-7.5% growth target set by the government for this year.

COVID-19 cases in the country reached 4,648 as of Sunday, with 297 casualties, according to the Department of Health. Recoveries totaled 197. — L.W.T. Noble





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