BENCHMARK interest rates are likely to remain steady even as inflation continues to ease as the central bank wants to be ready in case of a worse fallout from the coronavirus crisis, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said.
“The…cuts in the interest rates is meant to help the banks go through this crisis, and in turn, they can help their borrowers — the individuals and the firms — and so we’ll look at the need for it,” Mr. Diokno said in an interview with ABS-CBN News Channel on Monday.
“But at the moment, I think it is better that we maybe hold on to where we are right now so that [when] worst comes to worst, we have additional bullets,” he said.
“We are still looking at the data, but if there’s a need for further loosening, we will apply the full powers of the central bank,” the central bank chief said.
The Monetary Board is scheduled to meet to review its policy settings on June 25.
Mr. Diokno’s latest signal comes after May inflation data released on Friday showed inflation in May eased to a six-month low of 2.1%, following the 2.2% in April and the 3.2% in the same month last year..
The Philippine Statistics Authority said the slower inflation was supported by the decrease in food and transport prices during the month when the country was under lockdown measures to prevent the spread of the virus.
Benchmark rates are currently at record lows as the BSP slashed rates by a total of 125 basis points (bps) this year thus far to cushion the impact of the pandemic on the economy.
The key policy rate or the overnight reverse repurchase rate is currently at 2.75%, while the overnight lending and deposit rates are at 3.25% and 2.25%, respectively.
“There’s still an upside risk [to inflation] and that is mainly the price of oil, which as you know the price of oil has collapsed and that explains partly the lower inflation that month (May)… But now, I guess it’s inching up again,” Mr. Diokno said.
Oil prices have seen some correction since May after major oil exporters agreed to cut their production last month by 10 million barrels per day amid slow demand due to the pandemic. Last week, the Organization of the Petroleum Exporting Countries together with other allies decided to extend their record oil cuts until end-July.
Aside from the recovery in oil prices, Mr. Diokno said they are also seeing an uptick in commodity prices.
“The price has also gone up in the world market because many rice producers in the Mekong Delta area were impacted by the heavy rain. We are still monitoring these developments, Of course, we are still monitoring the global reaction to the pandemic [and] how soon the global economy will recover,” Mr. Diokno said.
“I’m not saying we’re not gonna cut this year or maybe next policy meeting, but we are closely looking at the data.”
He added that the BSP has room to cut banks’ reserve requirement ratio (RRR) if there is a need for additional liquidity.
“I promised to cut down the requirement…to single digit by the end of my term. It could come sooner,” he said.
Big banks’ RRR was reduced by 200 bps in April to 12% in a bid to boost liquidity during the lockdown. Meanwhile, thrift and rural banks’ reserve ratios are at four and three percent respectively. The Monetary Board gave Mr. Diokno the authority to reduce RRR by up to 400 bps this year.
Aside from RRR cuts, Mr. Diokno said the alternative reserve compliance which allows lenders to use credit to small businesses and large enterprises will also release cash into the financial system.
Economists said keeping rates steady at the Monetary Board meeting this month is “appropriate” and a “wise” move as the central bank has already done its part to stimulate the economy via various monetary actions since the pandemic started.
“It’s getting ready when you need it the most because right now, what has been done has been appropriate. The only thing missing is the fiscal side,” UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in a text message.
“I think this is wise on the part of the BSP, considering that there’s still a lot of uncertainty as to where events will take us,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in a text message.
For now, liquidity is at a good level, he said.
“Since the effect of the last cut will be lagged, the central bank will be closely monitoring this and then decide on the timing, if at all,” he said. Mr. Diokno has often said monetary policy could lag by about six to nine months before fully felt by the financial system.”
Domestic liquidity or M3, the broadest measure of money supply in an economy, grew 13.3% year on year to P13.1 trillion in March, faster than the 10.9% logged in February. — Luz Wendy T. Noble