MANILA, Philippines — The Bangko Sentral ng PIlipinas (BSP) surprised the market with an aggressive 50-basis-point cut to policy rates on Thursday, deepening monetary support to an economy coming out of stringent lockdowns in an attempt to bolster recovery.
Interest rate at the central bank’s overnight reverse repurchase facility now stands at a record-low of 2.25%, a level BSP hopes would be sufficient to encourage banks to lend and borrowers to get credit and revive their businesses battered by the coronavirus disease-2019 (COVID-19) pandemic.
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Many economists expected the BSP to hold key rates on Thursday's meeting.
“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,” BSP Governor Benjamin Diokno said in a statement after a scheduled policy meeting.
“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,” said Diokno, who also chairs BSP’s seven-man policymaking Monetary Board.
The latest cut highlights the propensity of challenges facing the economy and how far the BSP is willing to take the fight. Apart from interest rates now running below year-to-date inflation of 2.6% as of May, the central bank also lowered borrowing costs at the face of an expected slight uptick in consumer prices.
From 2.2% in May, BSP now sees inflation to average 2.3% by year-end before accelerating to 2.6% in 2021, a forecast also up from 2.5% originally.
In an online briefing after the policy meeting, BSP Deputy Governor Francisco Dakila said inflation projections were increased due to higher oil prices observed for the past six weeks. That said, the projections remain subdued and lie at the low-end of BSP’s 2-4% inflation target for both years.
“The main factor that led to the revision of the forecast is the increase in global oil prices but this was partly offset by the weaker economic growth both domestically and globally as well as the continued stability of the peso,” Dakila said.
The latest rate cut brings to 200 bps the total reduction on interest rates BSP delivered this year, the most of which were enforced when lockdown measures started in March, shuttering businesses and keeping a healthy consumer base stuck at home, hitting hard the economy that contracted 0.2% in the first quarter.
The target of rate cuts is to make bank loans more affordable, and while BSP director Dennis Lapid suggested credit remains cheap, the central bank also observed that money released by recent BSP easing has only been returning to the central bank through its auction facilities, instead of going to more productive activities like business expansion.
Coupled by a 200-bps cut in mandated bank reserves, the central bank has estimated freeing up P1.4 trillion in fresh cash to the financial system in order to support economic activities.
Dakila, however, is not worried. “This is understandable given the heightened uncertainty that is prevailing in the economy. But again, when we look at the level of domestic liquidity, we see that in April that has accelerated to 16.2% (year-on-year) as against the growth of 13.3% in March,” he said.
Dakila hopes that with the latest cut small and medium enterprises, which account for 98% of local firms, would access bank credit and “encourage consumers to spend.”
“There is a lag before all of these actions of BSP will have an impact on banks’ willingness to lend. However, we expect lending to pick up in the months ahead as restrictions that has been posed during the quarantine period continue to be relaxed,” he said.
Not yet out of moves
Sought for comment, Ruben Carlo Asuncion, chief economist at UnionBank of the Philippines, said BSP's latest action appears to be a "long-term take" on economic recovery "rather than a short-term response to the crisis." The International Monetary Fund, on Wednesday, said a global recovery is likely to take longer than initially anticipated, and weaker than originally estimated in 2021.
"As the economy hopefully responds to this expansionary move 12 to 24 months down the line, real interest rate may become positive again and may set up the Philippine economy for better prospects," Asuncion said in an online exchange.
Looking ahead, Dakila hinted BSP still has sufficient space to act more to rescue the economy if needed. "Going forward, if there is a need to infuse liquidity in the system, we can still make use of the policy space," he said.