BSP surprise: Another rate cut to push PH economic pedal | Inquirer Business
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BSP surprise: Another rate cut to push PH economic pedal

By: - Reporter / @daxinq
/ 05:16 PM November 19, 2020

MANILA, Philippines — In a move that few had anticipated, the central bank on Thursday (Nov. 19) cut its key interest rate by a quarter of a percentage point, driving yields deeper into negative territory and saying the Philippine economy needed more support and consumers more confidence after a tepid third quarter growth.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said that the prevailing low inflation rate regime also gave regulators enough room to release more liquidity into the financial system, hoping that this will accelerate spending.

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“Average inflation is seen to settle within the lower half of the target band for 2020 up to 2022, reflecting slower domestic economic activity, lower global crude oil prices, and the recent appreciation of the peso,” Diokno said at an online briefing.

“The balance of risks to the inflation outlook also remains tilted toward the downside owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic,” Diokno added.

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The Monetary Board’s decision to cut the interest rate on the BSP’s overnight reverse repurchase facility by 25 basis points brought the key rate, on which banks based lending rates, to 2 percent effective on Friday (Nov. 20).

Interest rates on overnight deposit were reduced to 1.5 percent and lending facilities to 2.5 percent.

Diokno said uncertainty “remains elevated” amid the resurgence of COVID-19 cases globally, and the Monetary Board saw that global economic prospects have “moderated” in recent weeks.

At the same time, the Monetary Board noted that while domestic output contracted at a slower pace in the third quarter of 2020, muted business and household sentiment and the impact of recent natural calamities could stir strong headwinds against economic recovery in the coming months.

“Given these considerations, the Monetary Board assessed that there remains a critical need for continuing policy support measures to bolster economic activity and boost market confidence,” Diokno said.

“With a benign inflation environment and stable inflation expectations, the Monetary Board sees enough policy space for a reduction in the policy rate at this juncture to uplift market sentiment and nurture the country’s economic recovery amid increased downside risks to growth,” he explained.

ING Bank Manila senior economist Nicholas Mapa described the central bank’s move as “a bid to resuscitate falling bank lending and combat the economic recession.”

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Mapa said while actual policy rates are now deep into negative territory, -0.5 percent, the BSP’s “fresh round of rate cuts” came as fourth quarter gross domestic product was “expected to worsen” from the third quarter’s 11.5 percent contraction.

Mapa said that despite the fresh round of rate easing, he was “not confident that bank lending will pick up anytime soon given the dimming growth outlook with unemployment elevated and consumer sentiment still negative.”

He also noted that the lack of fiscal stimulus may likely delay a sharp rebound in growth, which, in turn, will keep bank lending and investment appetite muted in the near term.

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TAGS: banks, BSP, Business, Diokno, economy, interest, lending, Rate cut
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