Rate cuts seen boosting consumer, business confidence

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The unexpected 50 basis point (bp) reduction in benchmark interest rates is being positioned as a measure to restore consumer and business confidence, the Deprtment of Finance said.

Finance Secretary Carlos G. Dominguez III said in an online forum organized by Bloomberg that to mitigate the adverse impact of the pandemic on the economy, bringing back confidence of consumers is of ”utmost importance.”

“We’ve seen that we have to bring back confidence to our bankers, (and) we have to bring back confidence to our consumers because our economy is about 70-75% consumption- driven,” Mr. Dominguez told said at the Emerging Market Debt: A Roadmap Beyond COVID-19 webcast late Thursday.

He was responding to Bloomberg Economics Senior Executive Editor Stephanie Flanders who inquired about the unexpected 50-bp reduction delivered by the Monetary Board (MB) earlier that day. Mr. Dominguez is a member of the MB.

“It is of utmost importance that we bring back the confidence of our public in spending again,” Mr. Dominguez said, noting that Governor Benjamin E Diokno would be a more authoritative.

The Bangko Sentral ng Pilipinas (BSP) Monetary Board surprised the markets late Thursday by reducing policy rates by 50 bps, bringing current rates to record lows of 2.25%, 2.75 and 1.75% for overnight reverse repurchases, lending and deposit facilities, respectively

The new rates took effect Friday.

So far this year, the MB has reduced benchmark interest rates by a total of 175 bps to help cushion the impact of the pandemic on the economy.

BSP Governor Benjamin E. Diokno said Thursday that the rate action was taken in response to the severe economic downturn worldwide, and noted that inflation has been benign.

Only three out of 13 economists polled by BusinessWorld last week forecast a rate cut at this MB meeting.

The BSP increased its inflation forecast for 2020 to 2.3% from 2.2%, which remained within its 2-4% target range.

The economy contracted by 0.2% in the first quarter.

The government’s economic team is projecting a 2-3.4% contraction in 2020 due to the fallout from the pandemic and lockdowns.

“We see that our economy is going to be hit hard. We will shrink by maybe about three and a half percent this year. But we’re ready for a big bounce back next year,” Mr. Dominguez said. — Beatrice M. Laforga