Diokno delivers early on promised rate cuts as COVID-19 accelerates BSP timetable
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno on Thursday (April 16) cut key interest rate by half a percentage point — five weeks earlier than the next scheduled meeting of policy makers — in response to the deepening effects of the coronavirus pandemic on the Philippine economy.
In a mobile phone message to reporters, Diokno said the 50-basis point rate cut will be effective starting Friday (April 17), bringing the overnight borrowing rate to 2.75 percent.
In doing so, the central bank chief delivered on his promise to to make cheaper funds available to the economy, which is expected to report zero growth this year at best, or contract by 1 percent at worst.
After the cut, the central bank’s policy rate will now be lower than the 3-percent level at the beginning of 2018, before a series of interest rate hikes totaling 175 basis points were implemented to fight off a sharp spike in the inflation rate.
The move was welcomed by market watchers.
“BSP has been proactive in providing stimulus as the Philippines grapples with the spread of COVID-19, forcing the government to implement stringent lockdown measures across the country,” ING Bank Manila senior economist Nicholas Mapa said.
He pointed out that, on top of cutting rates by 125 bps, the central bank has reduced banks’ reserve requirement by 200 basis points, bought up government bonds in the secondary market and entered into a P300-billion repurchase deal with the Bureau of the Treasury.
“Meanwhile, BSP’s reduction in the reverse repurchase volume was yet another unconventional policy easing, pushing some investors down to the overnight deposit facility window,” he said, explaining the central bank’s move to discourage banks from depositing their excess funds with the regulator and, instead, lend them out in the form of productive loans.
Earlier, Diokno said the central bank has been “crunching numbers” to gain a clearer picture of how the economy will perform, by quarter, under various assumptions knowing how the International Monetary Fund, the World Bank and the Asian Development Bank see the global economy performing in the near term.
“A few days ago, I said that the original goal of reverting to the 3 percent policy rate before the elevated inflation rates in 2018 was no longer appropriate,” he said.
“Recall that BSP has cut policy rate by 150 basis points since I assumed office last year. Given the coronavirus pandemic and the muted inflation outlook owing largely to the collapse of world oil prices and lower consumer demand, a deeper cut is warranted,” he added.
The central bank chief also pointed out that the timetable for reducing banks’ reserve requirements to single digits — something he promised would be attained before the end of hie term in 2023 — has now been “accelerated”.
“BSP has cut the reserve requirement ratio by 600 basis points, so far, the most recent was the 200-basis point cut in early April,” he said, explaining that the aggressive moves are necessary because it takes time for monetary policy adjustments to make an impact in the financial system.
“I have authority from the MB to cut the reserve requirement by another 200 basis points anytime this year,” referring to the Monetary Board, the BSP’s policy-making body.
Edited by TSB
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