Low inflation gives BSP room to further cut rates

The central bank expects the country’s inflation rate for April—due to be announced by the government on Tuesday morning—to remain low which, in turn, will give the monetary regulator enough room to pump more cheap money into the Philippine economy.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said, however, that he prefers to wait for empirical evidence that earlier reductions in interest rates and banks’ reserve requirements are having the desired effect of promoting growth before implementing additional measures.

“Clearly, the more benign inflation provides the Monetary Board greater room for easing,” he said in a mobile phone message to reporters. “However, since monetary policy works with a lag, it would be prudent on the part of the Monetary Board to see how the aggressive policy measures it has adopted have been absorbed by the financial system.”The central bank’s economists expect the April inflation rate to rise anywhere between 1.9 percent and 2.7 percent, although Diokno noted that the median estimate of analysts stood at only 2 percent.

“If realized, [this] means the third successive month of falling inflation this year,” he said, noting that January consumer price index came in at 2.9 percent, February’s at 2.7 percent and March’s at 2.5 percent.

The BSP forecasts 2020 annual inflation rate to average 2.2 percent, which is lower than its 2.75-percent overnight borrowing rate—an important gap, since it means financial investors are staying ahead of the rate at which the value of their assets are being eroded by inflation. Would these numbers give BSP more room for monetary easing given that the Philippines remains in a pandemic crisis? The central bank chief noted that, in response to the ongoing coronavirus pandemic, regulators have so far cut policy rates by 125 basis points and the reserve requirements of financial institutions by 200 basis points.

In addition, the central bank also allowed new loans granted by banks to micro, small and medium-sized enterprises (MSMEs) to be recognized as an alternative form of compliance with reserve requirements until the end of 2021.

The BSP reduced the credit risk weights of loans granted to MSMEs that are current in status to 50 percent from 75 percent of qualified MSME portfolios and 100 percent of nonqualified MSME portfolios.

“The reduced credit risk weight will be subject to review by end-December 2021,” Diokno said. “This will enable BSP to assess its effectiveness in channeling funds to the MSME sector before evaluating whether further easing is warranted.” INQ