BSP surprise: 50 bps cut to bring key interest rate to lowest level in history
The central bank on Thursday (June 25) cut its key interest rates to their lowest levels in history in a bid to buttress the Philippine economy that has been battered by the lockdown imposed by government to fight the COVID-19 pandemic.
The surprise 50-basis point rate cut — which almost no banker, economist or analyst expected — was announced at an online press briefing by Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno, who added that regulators were prepared to take more steps to support “non-inflationary growth.”
The Philippine economy is expected to contract by 3.6 percent this year, according to the International Monetary Fund. In light of this, the Monetary Board decided to cut by half a percentage point to 2.25 percent the interest rate on the BSP’s overnight reverse repurchase facility, used as a basis by banks in pricing their loans to borrowers.
“The Monetary Board observed that domestic economic activity has slowed with the enforcement of necessary protocols to slow the spread of the virus in the country,” Diokno said.
“At the same time, the outlook for global growth has deteriorated further as considerable uncertainty still surrounds the extent of the health crisis,” he said.
Interest rates on the overnight deposit and lending facilities were reduced to 1.75 percent for overnight deposit and 2.75 percent for lending facilities.
The central bank chief justified the aggressive rate cut by pointing to the institution’s latest baseline forecasts indicating that inflation could settle near the low end of the target range of 3 percent, plus or minus 1 percentage point inflation for 2020 to 2022, with inflation expectations remaining firmly anchored on future policies.
Diokno added that the balance of risks to the inflation outlook “leans toward the downside” from 2020 to 2022, owing largely to the potential impact of a deeper and more disruptive pandemic on domestic and global demand conditions.
“The Monetary Board noted that even as economies begin to reopen, the global recovery would likely be protracted and uneven,” Diokno said.
“Hence, there remains a critical need for continuing measures to bolster economic activity and support financial conditions, especially the effective implementation of interventions to protect human health, boost agricultural productivity and build infrastructure,” he said.
Given these, the central bank chief said the Monetary Board decided that a further reduction in the policy rate — amid a benign inflation environment — would help mitigate the downside risks to growth and boost market confidence.
“Even as domestic liquidity dynamics and market function continue to improve owing to prior liquidity-enhancing measures, the Monetary Board believes that keeping an accommodative stance will further ease the cost of borrowing and ensure ample credit and liquidity in the financial system as the economy transitions toward recovery in the coming months,” he said.
“The BSP remains committed to deploying its full range of monetary instruments and regulatory relief measures as needed in fulfilment of its mandate to promote non-inflationary and sustainable growth,” Diokno added.
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