Philippines: BSP delivers deep interest rate cut

MANILA, Philippines — As expected, the Bangko Sentral ng Pilipinas (BSP) yesterday delivered a deeper interest rate cut of 50 basis points to soften the impact of the coronavirus disease 2019 or COVID-19 outbreak on the economy.

BSP Governor Benjamin Diokno said the Monetary Board decided to implement a larger-than-expected cut in its benchmark interest rate in response to the disruptions to industries and private spending arising from the enhanced community quarantine in Luzon aimed at slowing the spread of the virus.

Diokno said COVID-19 has likewise dampened prospects for the global economy, which could negatively impact tourism and trade, overseas Filipino remittances, and foreign investments.

“Given these considerations, the Monetary Board decided that there is a need for a follow-on monetary policy response to address the adverse spillovers associated with the ongoing pandemic. With a manageable inflation environment and stable inflation expectations, the Monetary Board sees enough policy space for an assertive reduction in the policy rate at this juncture to cushion the country’s growth momentum and uplift market confidence amid stronger headwinds,” Diokno said.

The BSP has so far slashed interest rate by 150 basis points since May last year, almost reversing the tightening cycle in 2018 that saw interest rates rise by 175 basis points due to inflation breach.

Diokno said the Monetary Board lowered the inflation forecast to 2.2 percent for 2020 and to 2.4 percent for 2021, well within the BSP’s two to four percent target due to lower-than-projected inflation outturns in recent months, a sharp decline in global crude oil prices and the adverse effects of COVID-19 on global and domestic economic activity.

The BSP chief said the balance of risks to the inflation outlook now leans toward the downside for both 2020 and 2021.

“The uncertainty over the potentially protracted pandemic poses significant downside risks to aggregate demand,” he said.

To assist Philippine banks, Diokno said the Monetary Board approved the time-bound, temporary relaxation of BSP regulations on compliance reporting by banks, calculations of penalties on required reserves, and single borrower limits.

Furthermore, he said the regulator also approved a temporary reduction in the term spread on rediscounting loans relative to overnight lending rate to zero.

 “The monetary policy easing is also aimed at mitigating the risk of financial sector volatility in light of unfolding global developments by ensuring adequate domestic liquidity and credit in the financial system as well as lowering borrowing costs for affected firms and households,” Diokno said.

The BSP chief reiterated the health and safety of the Filipino people are the government’s foremost priority.

“In this regard, the Monetary Board reiterates its support for urgent and carefully coordinated measures with other government agencies to alleviate the spillover effects of the pandemic on people and firms, with a view toward preventing any long-lasting economic and social damage,” he said.

According to the BSP, it will remain data-driven as it considers a range of other supplementary measures that may be required to support non-inflationary and sustainable growth over the medium term.

Diokno said the supplemental actions could include recalibrating the interest rate corridor settings, reducing the reserve requirement ratios, suspending the term deposit facility (TDF) auctions, and ensuring access to liquidity-enhancing facilities such as the rediscounting windows.

“The BSP is prepared to use its full range of monetary instruments and to deploy regulatory relief measures as needed in fulfillment of its price and financial stability mandates,” he said.

ING Bank Manila senior economist Nicholas Mapa said the BSP is likely to roll out additional measures to ease liquidity conditions further such as the lowering of the term deposit facility volumes and or RRR reductions in the near term.