MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to keep benchmark interest rates steady in the near term amid reduced demand for loans despite all-time low rates due to the COVID-19 pandemic, according to British banking giant HSBC.
Noelan Arbis, economist at HSBC, said the Monetary Board is likely to keep its policy rate steady today at an all-time low of 2.25 percent to allow authorities to come up with an appropriate fiscal package.
“We expect the BSP to keep its policy rate steady on Aug. 20,” Arbis said.
The country’s gross domestic product (GDP) contracted by nine percent in the first half after shrinking by a record 16.5 percent in the second quarter from 0.7 percent in the first quarter due to measures to contain further spread of the deadly disease.
This prompted the British bank to revise its GDP forecast to a contraction of 9.6 percent and a slower recovery with a growth of 5.7 percent instead of seven percent for next year.
“The country’s economic troubles call for continued policy support, but we don’t believe additional rate cuts are the answer at this juncture. The BSP has already been one of the most aggressive central banks globally in reducing interest rates,” Arbis said.
The BSP has been doing all the heavy lifting, cutting interest rates by 175 basis points, lowering the reserve requirement ratios for banks, purchasing government securities in the secondary market, entering into a P300 billion repurchase agreement with the Bureau of the Treasury, among others unleashing P1.3 trillion into the financial system.
“Meanwhile, we may be seeing the limits of monetary policy,” he said.
Arbis said recent data showed the rise in bank lending has declined in recent months despite rising liquidity growth,
“This suggests reduced demand for loans, despite record-low interest rates,” he said.
The economist also cited the pronouncement made by BSP Governor Benjamin Diokno that “he sees no strong reason for another policy cut” at this juncture.
He said HSBC believes fiscal stimulus is likely to be the priority for now.
“We expect the BSP to keep its policy rate on hold until the fourth quarter, paving the way for fiscal authorities to first come up with an appropriate fiscal package, before engaging in additional monetary easing to help boost growth,” he said.