BSP sees no reason for further easing

By Luz Wendy T. Noble, Reporter

THE Bangko Sentral ng Pilipinas (BSP) is not inclined to cut rates further at this time and will likely keep rates steady in the next quarters, BSP Governor Benjamin E. Diokno said on Monday.

“There is no compelling reason why the BSP has to move sooner on further policy cuts at this time. Monetary policy works with a lag so our reading is that our aggressive monetary policies have yet to be digested by the market,” Mr. Diokno said in an interview with ABS-CBN News Channel.

The Philippines plunged into recession for the first time since 1991 after gross domestic product (GDP) contracted by 16.5% in the second quarter. Economic activity collapsed as the government implemented one of the world’s strictest and longest lockdowns to curb the spread of the coronavirus disease 2019 (COVID-19).

The central bank already slashed rates by a total of 175 basis  (bps) points this year, with the latest cut worth 50 bps unleashed at the June 24 Monetary Board (MB) policy meeting. This reduced the overnight reverse repurchase, lending, and deposit rates to record lows of 2.25%, 2.75%, and 1.75%, respectively.

Mr. Diokno said keeping rates unchanged for the rest of the year is “a possibility.”

“In fact, the current monetary policy stance will probably hold for the next few quarters because as I said, we have acted decisively in anticipation of the crisis,” he said.

Mr. Diokno was asked regarding the next policy action of the MB for its Aug. 20 meeting, given he has previously said the sharp contraction in the second-quarter GDP is temporary and will not hurt the country’s macroeconomic fundamentals.

“The 16.5% contraction of Q2 GDP does not mean that the Philippine economy is structurally weak. It is inappropriate to compare the Q2 performance of the economy with other crises in recent Philippine history,” Mr. Diokno said in a text message.

Mr. Diokno said the country used to belong to a select group called “heavily indebted countries” in the 1980s which is not similar to its standing today. The Philippine economy, he said, is backed by a strong peso, low interest rate environment, ample dollar reserves, and low debt-to-GDP ratio.

“The economy plunged because of the strict nationwide lockdown to save lives and to allow the buildup of health facilities and testing capacity due to the pandemic. It is not because the economy is weak,” he said.

The previous policy cut, which was “a pre-emptive anticipation of the steeper Q2 GDP contraction,” may have yet to work its way into the financial system, said Security Bank Corp. Chief Economist Robert Dan J. Roces.

“Probably the monetary authorities will seek to preserve its ammunition for the time being while confidence levels stay low and an adequate fiscal stimulus response is being discussed in Congress,” Mr. Roces said in a text message. 

Meanwhile, Euben Paracuelles and Rangga Cipta, analysts at Nomura Global Markets Research, are pricing in further easing due to delays in enacting a sizable fiscal support package, as the government looks to be “placing higher priority on longer-term reforms.”

“Despite some indications from the governor that the BSP may ‘pause,’ we still forecast a 25bp policy rate cut to 2% in Q3, and add another 50bp in cuts in Q4, which would take the policy rate to 1.5% by year-end. We believe the Q2 growth outturn disappointing official forecasts and a weaker economic outlook, as reflected in the government’s downward revision of its 2020 GDP growth forecast range and the risk of a fiscal cliff in H2, should support further monetary easing by BSP,” Nomura analysts said in a report.

Emmanuel J. Lopez, economist and dean at the Colegio de San Juan de Letran Graduate School, said the central bank should continue its aggressive easing to boost market sentiment during the recession.

“I believe Mr. Diokno should employ further cuts in the policy rates to ease the effects of the recession, to attract borrowing and investment plus consumer spending,” Mr. Lopez said in a text message.

Data from the Philippine Statistics Authority showed household spending, which makes up 70% of the economy, slumped by 15.5% in Q2, a reversal from the 5.6% expansion a year ago. Meanwhile, private investment or capital formation plummeted by 53.5% which was its worst since the 54.6% decline in the first quarter of 1985.