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Philippines: BSP expected to cut rates on Thursday
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is seen cutting interest rates by 50 basis points or more on Thursday to cushion the impact of the coronavirus disease 2019 or COVID-19 on the economy.
BSP Governor Benjamin Diokno said in a television interview that monetary authorities have enough space as the Monetary Board has yet to fully unwind the 175 basis points rate hikes in 2018 after an inflation breach.
“I think the 25 basis points, that is almost a certainty. It could go even higher because of the seriousness of the situation and also the sharp drop in the price of oil,” Diokno said.
Last December, the BSP chief signaled a 50 basis points reduction in benchmark rate this year, of which 25 basis points was delivered last Feb. 6 as a preemptive move to support market confidence and ward off potential spillovers associated with increased external headwinds.
The Philippine central bank has so far slashed interest rates by 100 basis points since May last year amid the benign inflation and slower than expected gross domestic product (GDP) growth.
Diokno said any decision or further easing would also consider the action of the US Federal Reserve to slash interest rates to near zero and to buy $700 billion in treasury and mortgage-backed securities following another emergency meeting as part of the US government’s urgent response to the COVID-19 pandemic.
“You know an off-cycle meeting by Fed is unusual, and with a huge cut of 50 basis points, that is a major factor. I think they will meet again on the 17th and 18th, so there may be a follow through. So we are going to consider that in our discussion,” Diokno said.
The BSP’s Monetary Board is scheduled to hold the second of its eight rate-setting meetings for the year on Thursday.
Aside from the impact of the COVID-19, Diokno said authorities would also talk about the extremely low oil prices and its impact on inflation during the meeting scheduled on March 19.
The price of oil in the world market, he explained, has plunged to about $32 per barrel from about $84.12 per barrel in October last year.
Diokno said there is a need to act aggressively amid the crisis so as to maximize the impact of the monetary action on the economy.
“As you know monetary policy works with a lag, so if you want the maximum impact you have to do it earlier rather than later. We still have both monetary and fiscal policy even with a 50 basis points cut on Thursday,” he said.
The BSP chief said the Philippines also has a huge fiscal space as the country’s debt-to- GDP ratio stands at around 40 percent versus the 100 percent in other countries, while the gross international reserves (GIR) stood at $87.61 billion in February and enough to cover 7.7 months’ worth of imports of goods and payments of services and primary income.
Diokno said the uncertainty brought about by the COVID-19 pandemic is expected to further worsen in the coming weeks.
“The consensus is that the situation will get worse before it gets better. So all of these will be considered during the meeting on Thursday,” he said.
ING Bank Manila senior economist Nicholas Mapa said there is no reason to delay the planned dialing back of the previous rate hike cycles with inflation forecast to tank and economic activity expected to ground to a halt.
“Diokno will likely need to accelerate his bid to unwind the 2018 rate hikes to bring out all the heavy artillery with a likely 50 basis points rate reduction or even going all in with a 75 basis points rate reduction,” Mapa said.
Robert Dan Roces, chief economist at Security Bank, now expects the BSP to slash interest rates by 50 basis points instead of only 25 basis points on Thursday after the action taken by the US Fed.
Roces said that additional liquidity measures, including the reduction of the reserve requirement ratio by 100 basis points, would most likely be taken as well.
“The Philippines has ample monetary space to do this, but a policy mix that’s heavier on fiscal policies should do the trick in containing any economic fallout,” Roces said.
Union Bank chief economist Ruben Carlo Asuncion said the BSP is expected to respond immediately with a 50 basis points rate cut on Thursday.
“But aside from this, I also expect the legislative to come up with a strong fiscal stimulus to help buoy the economy from the negative impact of the Covid-19. The P108-billion fiscal stimulus proposal authored by Rep. Stella Quimbo is very much needed,” Asuncion said.
Source: https://www.philstar.com/business/2020/03/17/2001403/bsp-expected-cut-rates-thursday