THE Bangko Sentral ng Pilipinas (BSP) fired a widely expected rate cut on Thursday to shield the economy against the impact of the coronavirus disease 2019 (COVID-19) outbreak, joining central banks around the world that have eased to help boost activity amid an expected slowdown.
The central bank also imposed additional regulatory relief measures to prop up the banking system amid business disruptions due to the enhanced community quarantine in Luzon meant to contain the spread of the virus.
On Thursday, the BSP’s Monetary Board (MB) slashed policy rates by 50 basis points, reducing the overnight reverse repurchase rate to 3.25%. Overnight lending and deposit rates have likewise been trimmed to 3.75%, and 2.75%, respectively.
“With a manageable inflation environment and stable inflation expectations, the Monetary Board sees enough policy space for an assertive reduction in the policy rate at this juncture to cushion the country’s growth momentum and uplift market confidence amid stronger headwinds,” BSP Governor Benjamin E. Diokno said in a statement on Thursday.
“The monetary policy easing is also aimed at mitigating the risk of financial sector volatility in light of unfolding global developments by ensuring adequate domestic liquidity and credit in the financial system as well as lowering borrowing costs for affected firms and households,” Mr. Diokno added.
A BusinessWorld poll last week saw 12 out of thirteen economists expecting a rate cut of at least 25 bps, with some also penciling in a 50-bp reduction amid heightened economic risks due to the spread of COVID-19.
This latest rate cut follows the 25-bp reduction in February. This means the central bank has already slashed rates by a total of 150 bps since 2019, almost completely unwinding the 175 bps in hikes implemented in 2018.
Aside from the rate cut, Mr. Diokno said the MB also “authorized the time-bound, temporary relaxation of BSP regulations on compliance reporting by banks, calculation of penalties on required reserves, and single borrower limits (SBL).
The central bank has a 25% SBL for big banks to manage their loan exposure.
“The Monetary Board also approved a temporary reduction in the term spread on rediscounting loans relative to the overnight lending rate to zero,” Mr. Diokno added.
The central bank chief said they will be “data-driven” in assessing the need to roll out more initiatives “to support non-inflationary and sustainable growth over the medium term.”
He assured that the BSP is prepared to use its range of monetary tools and deploy regulatory relief measures in line with their mandate to support price and financial stability.
“These supplemental actions may include, but are not limited to, recalibrating the interest rate corridor settings; reducing the reserve requirement ratios (RRR), suspending the term deposit facility (TDF) auctions; and ensuring access to liquidity-enhancing facilities such as the rediscounting windows,” Mr. Diokno said.
The BSP has previously made off-cycle reductions in the RRRs of lenders. Currently, the reserve ratio for big banks is at 14%, while those of thrift and rural banks are at four percent and three percent, respectively.
In a note sent to reporters on Thursday, ING Bank N.V.-Manila Senior Economist Nicholas Antonio T. Mapa said the month-long enhanced community quarantine covering Luzon affects 74% of gross domestic product, which could dim the growth outlook in the coming months.
“Given the imminent downturn in economic activity and the softening of the inflation outlook due to the drop in global crude oil, the BSP was afforded even more scope to cut policy rates,” Mr. Mapa said.
“Lower rates would do little to ignite loan demand given that more than half of the workforce is holed up in their homes given strict curfews and restrictions for movement,” he added.
Meanwhile, UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said the rate cut is a welcome development and a move in the right direction, but said this is “not the only weapon to quash the symptoms of the virus spread.”
“Thus, the BSP has to be ready, and generally, the government, in coordinating policy moves, both monetary and fiscal ones,” Mr. Asuncion said in an e-mail.
Security Bank Corp. Chief Economist Robert Dan J. Roces, meanwhile, noted the regulatory relief measures from the BSP will help lenders “roll out transmission into the financial system much faster, especially with the latest cut.”
“A heavy fiscal response to match the monetary stimulus is being readied by the authorities, and that will prove to be ample as a response to this pandemic,” he added.
INFLATION TO DROP
Meanwhile, the BSP now forecasts headline inflation to average at 2.2% this year from 3% in the previous meeting. The 2021 view was likewise downgraded to 2.4% from 2.9% previously. Both are closer to the lower end of the 2-4% target of the BSP for both years.
“The latest forecasts are (substantially) below the February monetary policy meeting projections…due to lower-than-projected inflation outturns in recent months, a sharp decline in global crude oil prices, and the adverse effects of COVID-19 on global and domestic economic activity,” Mr. Diokno said.
Inflation averaged at 2.9% in 2019. In February, inflation eased to 2.6% from the 2.9% logged in January and the 3.8% seen a year ago on the back of lower food, transport, and utility prices.
Mr. Diokno said the balance of risks to the inflation outlook is still geared towards the downside for this year and next, as uncertainties caused by the “potentially protracted pandemic” could affect aggregate demand.
“The Monetary Board noted that while the enforcement of the quarantine measures could help in slowing the spread of the virus, the resulting disruptions to industries and private spending are likely to reduce economic growth in the near-term,” he said.
The central bank chief said COVID-19 has also dampened prospects for tourism and trade, remittances, and foreign investments.
The government targets economic growth of 6.5-7.5% after a below-target 5.9% expansion in 2019. However, Socioeconomic Planning Secretary Ernesto M. Pernia has already warned gross domestic product growth could drop by as much as 1.2 percentage points if the outbreak persists for a year.
There were 217 confirmed COVID-19 cases in the country and 17 reported deaths as of Thursday afternoon. — Luz Wendy T. Noble