MANILA, Philippines — In its strongest response to the coronavirus disease (COVID-19) pandemic to date, the central bank on Thursday cut its key interest rate by half a percentage point in a move meant to help the Philippine economy regain its momentum after a widely expected slowdown.
In a phone message to reporters, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the 50-basis point rate cut was also augmented by the Monetary Board with a broad relief package meant to help both banks as well as their borrowers.
“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,” he said.
“In addition, the Monetary Board authorized the time-bound, temporary relaxation of BSP regulations on compliance reporting by banks, calculation of penalties on required reserves, and single borrower limits,” Diokno added.
The Monetary Board also approved a temporary reduction in the term spread on rediscounting loans relative to the overnight lending rate to zero, adding that authorities will issue the detailed guidelines on these monetary measures and regulatory forbearance items shortly.
Even after this decisive move, Diokno pointed out that the central bank stands ready to implement further measures that may be required to support non-inflationary and sustainable growth over the medium term.
“These supplemental actions may include, but are not limited to, recalibrating the interest rate corridor settings; reducing the reserve requirement ratios; suspending the term deposit facility auctions; and ensuring access to liquidity-enhancing facilities such as the rediscounting windows,” he said. “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.”
The central bank chief noted that the latest baseline forecasts indicate a lower path of inflation for 2020 and 2021, with inflation expectations remaining firmly anchored within the target range of 3.0 percent, plus or minus 1 percentage point over the policy horizon.
Average inflation is seen to settle at 2.2 percent in 2020 and 2.4 percent in 2021.
“The latest forecasts are substantially below the February monetary policy meeting projections of 3.0 percent for 2020 and 2.9 percent for 2021 due to lower-than-projected inflation outturns in recent months, a sharp decline in global crude oil prices, and the adverse effects of the 2019 novel coronavirus disease on global and domestic economic activity,” he said.
All told, the central bank believes that the so-called 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,” Diokno said. “The Monetary Board noted that while the enforcement of quarantine measures could help in slowing the spread of the virus, the resulting disruptions to industries and private spending are likely to reduce economic growth in the near term.”
“Moreover, COVID-19 has likewise dampened prospects for the global economy, which could negatively impact tourism and trade, overseas Filipino remittances, and foreign investments,” he said.
Because of these considerations, Diokno explained that the Monetary Board decided that there was 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,” he said.