Diokno calls Monetary Board’s rate cut pause ‘appropriate’

THE decision by the Bangko Sentral ng Pilipinas (BSP) Monetary Board to pause its rate reduction moves is “appropriate” because the central bank needs to gauge market conditions as pandemic restrictions approach a seventh month, BSP Governor Benjamin E. Diokno said.

“At the moment, we’re happy. Our assessment is that a continued pause for further monetary easing is appropriate,” Mr. Diokno said in an interview with ABS-CBN News Channel Monday.

Asked whether the pause will continue for the remaining months of 2020, Mr. Diokno said it is “difficult” to give an answer in light of unfolding events.

“I would like to emphasize the BSP policy decisions will always be data-dependent. And so, it is difficult to say with absolute certainty what our monetary policy actions will be for the rest of the year given how fluid the current economic environment is and how unpredictable the virus has been,” Mr. Diokno said.

In a separate speech at the Annual Financial Executives of the Philippines Week Conference held virtually, Mr. Diokno has said the “worst of the pandemic is behind us.”

“We expect our recovery process to continue as more industries reopen following the relaxation of the quarantine measures,” he said.

The Monetary Board once again kept policy rates unchanged in its meeting Thursday. This followed an Aug. 21 decision to keep benchmark rates steady after 175 basis points worth of easing this year, which has lowered the overnight reverse repurchase, lending, and deposit rates to record lows of 2.25%, 2.75%, and 1.75%, respectively.

This “prudent” pause will likely be the stance until at least 2021, according to Fitch Solutions Country Risk & Industry Research.

“The decision to hold was in line with our view that the BSP will maintain its key policy rate at 2.25% through to late 2021, where the next move will be a hike,” it said in a note issued Monday.

Mr. Diokno has said the policy stance may likely be valid for the next few quarters as earlier monetary action had been taken on the assumption of a drastic hit to the economy from the pandemic.

“The BSP has noted ‘ample liquidity’ and we believe as domestic activity picks up, demand for credit will rebound, proving the financial conditions sufficient,” Fitch Solutions said.

Mr. Diokno has said a liquidity boost from the monetary policy measures amounted to P1.5 trillion, equivalent to about 7.6% of gross domestic product (GDP). Despite this, lending by big banks grew only by 4.6% in August, behind the 6.7% pace in July and the lowest since the 4.4% rise in November 2006.

J.P. Morgan has projected that the central bank will focus on managing liquidity as economic conditions improve.

“The domestic pandemic peak is likely past, and thus we think the central bank will now turn its focus to liquidity operations. With the stabilization of market conditions, the central bank has stepped up liquidity-absorbing operations mainly through its overnight deposit facility in recent months,” it said in a note.

On the other hand, Nomura Global Markets Research said it is still pricing in a possible rate cut within this year should the recovery lag.

“We believe the third quarter [GDP] outturn is likely to disappoint BSP’s expectation on the pace of the recovery because of very weak business and consumer confidence, which are at or near record lows despite the economic reopening since June and the slump in fiscal spending growth in July and August.” it said in a report.

Nomura said market sentiment could also turn cautious due to risks generated by the US presidential election in November.

The economy contracted by a record 16.5% in the three months to June, capturing the most severe weeks of the lockdown. While restrictions have since been eased, the government expects the GDP to contract by 4.5% to 6.6% this year.

“We think BSP’s pause at its last two meetings is unlikely to last long and hence we still forecast a total of 75 bps in rate cuts this year, taking the policy rate to a record-low 1.5%,” it said.

The last two Monetary Board policy review meetings this year are set on Nov. 19 and Dec. 17. — Luz Wendy T. Noble