BSP’s answer to deepening COVID-19 crisis: Deeper rate cuts

The central bank will likely cut its key interest rate by a larger amount when the policy making Monetary Board convenes on Thursday (March 18), in an effort to buttress Philippine economic growth that is being threatened by the novel coronavirus disease 2019 (COVID-19) pandemic.

Bangko Sentral ng Pilipinas Governor Benjamin Diokno also pointed out that authorities continue to have substantial leeway to ease monetary policy, with interest rates still above levels seen before a string of increases implemented in 2018.

In a text message, Diokno said the BSP “might consider a deeper cut, say 50 basis points” to stimulate an economy being battered by collapsing world oil prices, worsening COVID-19 outbreak, a slowing global economy and inflation fears.

But such an action will come during the policy-setting meeting of the central bank’s seven-man board that happens every six weeks and not a day sooner.

“There will be no off-cycle meeting,” he said. “The Monetary Board will meet as scheduled on Thursday.”

Diokno noted that, to date, the US Federal Reserve has reduced its benchmark rate by 170 bps, the New Zealand central bank by 75 bps and South Korea’s by 50 bps.

This, coupled with the low inflation rate regime prevailing in the Philippines, opens the door for a deeper rate cut, locally, he said.

In a separate interview with Bloomberg TV, the central bank chief explained that the Philippine monetary authority has so far reduced local interest rates progressively by 100 bps, after the cumulative 175-bps hike it imposed to slay high inflation in 2018.

That means the BSP still has leeway to cut at least 75 bps, and possibly even more, when the low inflation rate is taken into account.

Diokno explained that, in addition to monetary space, the Philippine government also has ample fiscal space, because of the low debt-to-gross domestic product rate the country is currently enjoying.

“Monetary policy is most effective when used in conjunction with fiscal policy,” he said.

Earlier, the central bank chief sought to reassure jittery financial markets that the country’s economy was strong enough to weather the COVID-19 pandemic, saying what was being faced is a “public health crisis” and not an economic crisis.

Edited by TSB