VIRUS, STORMS FORCE BSP TO CUT RATES ANEW
IN an unprecedented move, the Bangko Sentral ng Pilipinas (BSP) decided to cut its interest rates anew on Thursday as threats to the economy’s recovery pile up.
BSP Governor Benjamin Diokno announced a 25- basispoint cut in its main policy rate, pushing the country’s overnight reverse repurchase facility to its lowest at 2 percent, effective Friday, 20 November. The interest rates on the overnight deposit and lending facilities were likewise reduced to 1.5 percent and 2.5 percent, respectively.
According to Diokno’s statement, the Monetary Board sees a “critical need” for continued policy support to boost economic activity and market confidence.
“The Monetary Board also observed 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 pose strong headwinds to
the recovery of the economy in the coming months,” he said.
This puts the BSP’S total cuts to 200 basis points for the entire year.
In February, their first meeting of the year, they cut their rates by 25 basis points as the threat of Covid-19 emerges in other countries. In March, just days after the first implementation of community quarantine in Luzon, the BSP cut its interest rates by 50 basis points. This was supplemented by another 50-basis-point cut in an off-schedule Monetary Board meeting in April, and another 50-basis-point cut in June.
In their last two meetings, the BSP moved to keep all interest rates unchanged for a “prudent pause” in monetary easing.
Economists had earlier forecast a “no move” from the BSP, citing the importance of fiscal stimulus at this point over monetary stimulus.
“A lower-than-expected thirdquarter gross domestic product print, a quintet of unexpected destructive storms and a coronavirus that is still there. BSP may have seen these as enough drivers to cut 25 basis points, bringing this year’s total rate reduction to 200 basis points,” Unionbank Chief Economist Ruben Carlo Asuncion said.
“We expected a continuation of the BSP’S prudent pause, but it seems, just like the Magat Dam’s need to release water that flooded the plains of Isabela and nearby Cagayan, an overflow of warning signs may be too much to handle,” he added.
INFLATION, meanwhile, continues to be stable.
In the BSP’S latest inflation models, price growth is still expected to remain within target up until 2022 albeit some slight changes in their actual forecast numbers.
BSP Deputy Governor Francisco Dakila said they have revised the 2020 inflation outlook to 2.4 percent from the previous 2.3 percent. For the next two years, meanwhile, the BSP lowered its forecast: 2021 inflation is not expected to hit 2.7 percent from the 2.8 percent earlier forecasted, while 2022 inflation is expected to hit 2.9 percent from the 3 percent earlier expectation.
“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,” Diokno said.
ING Bank economist Nicholas Mapa said the BSP was likely “forced into action” as the economy reels from two large crises.
“Although real policy rates are now even deeper into negative territory at - 0.5 percent, the Central Bank pressed on with a fresh round of rate cuts as fourth-quarter GDP is now expected to worsen from the third-quarter GDP of 11.5-percent contraction. Agriculture and real property damage from a string of violent typhoons is expected to shave off 0.15 percentage points from 2020 growth and may have convinced Governor Diokno to act while fiscal stimulus remains largely modest,” Mapa said.
Can cut churn economy?
THEORETICALLY, central banks use interest rate cuts to boost the economy. Lower interest rate cuts translate to the market as lower financing costs, thereby creating an encouraging environment for borrowing and investment.
However, despite the previous 175-basis-point cut by the BSP, bank lending continued to slow down in recent months.
Latest data show that bank lending—a primary driver of domestic liquidity—grew at 2.8 percent in September, weaker than the 4.7-percent growth in August. This was attributed to banks’ reduced tolerance for risk, decline in loan demand due, in turn, to weak business and income prospects and an observed shift by nonfinancial corporates to alternative sources of funds.
Mapa believes the fresh interest rate cut won’t budge bank lending back up.
“Despite the fresh round of easing, we are not confident that bank lending will pick up anytime soon given the dimming growth outlook with unemployment elevated and consumer sentiment still negative. Meanwhile, 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,” Mapa said.
However, in the post monetary policy press briefing, Deputy Governor Dakila said the cut is expected to restore confidence and increase market activity.
“What this interest rate cut does is to provide an impetus that people will be much more likely to have confidence to get into the financial system again when interest rates are around the accommodative side, and the low side. So that’s where it will happen. It will help to speed up the process of recovery,” he said.
RCBC economist Michael Ricafort also said: “Extraordinary economic conditions largely brought about by the Covid-19 pandemic call for extraordinary measures such as more aggressive/preemptive monetary easing measures, such as the latest 0.25-percent cut in local policy rates, that definitely help boost economic recovery prospects, going forward.”
Last cut for the year?
THE BSP still has one more scheduled monetary policy meeting for the year on December 17.
“We believe that BSP will likely pause at its December meeting now that real policy rates have fallen even deeper into negative territory with the Central Bank likely calling for a renewed push for additional fiscal spending to address the freefall in economic activity as Covid-19 infections remain elevated in the country,” Mapa said.
However, Diokno expressed his openness to move further if needed.
“Looking ahead, the BSP stands ready to deploy its full arsenal of instruments as needed in fulfillment of its mandate to maintain price and financial stability conducive to sustainable economic growth,” he said.