THE central bank is expected to cut rates further next year. — BW FILE PHOTO

THE CENTRAL BANK will likely resume easing by the first quarter of 2021, which could help boost bank lending as borrowers are still worried amid uncertainties due to the coronavirus pandemic, Hongkong and Shanghai Banking Corp. (HSBC) Global Research said.

Slower lending growth seen recently is “not about interest rates,” HSBC economist Noelan Arbis said in a note sent to reporters on Tuesday, noting borrowers remain “wary of adding leverage due to the uncertainties caused by the pandemic.

This, even as the Bangko Sentral ng Pilipinas (BSP) has been one of the “most aggressive central banks globally” in terms of easing. The central bank has slashed benchmark interest rates by 175 basis points (bps) this year to provide support to the economy. The overnight reverse repurchase, lending, and deposit rates are at record lows of 2.25%, 2.75%, and 1.75%, respectively.

Despite this, central bank data showed outstanding loans by big banks rose by 6.7% in July, easing for the fourth straight month and slower than the 9.6% pace seen in June.

“Thus a containment of the virus domestically is likely to be a prerequisite before additional rate cuts lead to a pickup in loan growth. As a result, we have pushed back our 25-bp rate cut forecast to the first quarter of 2021 (previously fourth quarter of 2020),” Mr. Arbis said.

“Despite the challenging economic outlook, we don’t believe additional rate cuts at this juncture would be supportive of growth,” he added.

As rate cuts seem to have limited impact on lending for the time being, Mr. Arbis said the central bank looks “more willing” to utilize other monetary tools to support growth, including through debt monetization.

Republic Act No. 11494 also known as Bayanihan II expanded the amount the BSP may directly lend to the government to 30% of its average annual revenue from the 20% cap set under RA 7653 or The New Central Bank Act. This translates to about P850 billion from the previous P540 billion the BSP can lend to the National Government.

In March, the BSP purchased P300 billion in government securities from the Bureau of the Treasury through a repurchase agreement to support crisis response.

Bayanihan II allows the advances to be settled within a year, with maturity allowed for a further one-year extension subject to the Monetary Board’s approval. This two-year leeway for payment shows the provision is a “credible exit strategy,” Mr. Arbis said.

“But an extension of the government’s access to the additional funds and/or a further increase in the amount the BSP is able to lend to the government, either of which would require a new law, could pose questions regarding the BSP’s independence from fiscal authorities,” he noted.

Mr. Arbis said government financing from the BSP is not required in the current situation.

“Additional liquidity injections — either through deficit financing or RRR (reserve requirement ratio) cuts — may be warranted alongside a sizeable fiscal stimulus program,” Mr. Arbis said.

“We believe it would be more prudent for the government to first tap into this excess liquidity before engaging in additional borrowing from the BSP. Additional RRR cuts may be in store in 2021, but it will be highly dependent on the government’s fiscal impulse,” he added.

The BSP in April cut big banks’ RRR by 200 bps to 12%, while the reserve requirements for thrift and rural lenders were trimmed by 100 bps to three percent and two percent, respectively. The Monetary Board has authorized RRR cuts of up to 400 bps this year. — LWTN