‘Rate, RRR cuts no longer effective to stoke demand’

MANILA, Philippines — The additional interest rate cuts and further lowering of banks’ reserve requirement ratios by the Bangko Sentral ng Pilipinas (BSP) are no longer effective in stoking demand amid the COVID-19 pandemic, according to British banking giant HSBC.

In a report, HSBC economist Noelan Arbis said the Monetary Board is likely to keep its policy rate on hold during the scheduled rate-setting meeting on Thursday.

Likewise, the BSP is expected to maintain the level of deposits banks are required to keep with the BSP for the rest of the year after a 200-basis point cut for big banks on March 30 and 100 basis-point cut for mid-sized and small banks on July 31.

Arbis said HSBC now expects the BSP to resume its easing measures with another cut in the first quarter of next year as rate cuts or liquidity injections are unlikely to be effective at this juncture in stoking loan demand.

“We expect the BSP to keep its policy rate on hold at 2.25 percent on Oct. 1, we move our 25-basis point rate cut forecast to first quarter of 2021. Despite the challenging economic outlook, we don’t believe additional rate cuts at this juncture would be supportive of growth,” Arbis said.

The Philippines slipped into recession for the first time in more than two decades as the gross domestic product (GDP) contracted by a record 16.5 percent in the second quarter.

HSBC sees the Philippine economy contracting by 9.6 percent this year due to COVID-19. The bank expects the Philippines to recover next year with a growth of 5.8 percent.

“There hasn’t been much improvement even after the lockdown measures in Metro Manila were eased in mid-August. New daily cases also remain elevated despite slowing from their peak. The persistence of COVID-19 will continue to weigh on the country’s economic recovery in the quarters ahead,” Arbis said.

Last Aug. 20, the BSP took a prudent pause and kept the benchmark rate at an all-time low of 2.25 percent to allow previous aggressive easing measures to work their way through the economy.

“The BSP has already been one of the most aggressive central banks globally, reducing its policy rate by 175 basis points to a record low of 2.25 percent this year. Despite that, bank lending growth has declined to its lowest pace in over 10 years,” Arbis said.

Credit growth slowed down for the third straight month to a single-digit level of 9.6 percent in June from 11.3 percent in May. This was the slowest growth since the 9.3 percent expansion booked in October last year.

He also said corporate and individual borrowers remain wary of adding leverage given ongoing economic uncertainties.

Arbis said deficit financing from the BSP is not required at this juncture as additional liquidity injections are warranted alongside a sizeable fiscal stimulus program.

He said government officials remain at odds over the appropriate amount of fiscal support to provide to the economy with the P165.5 billion under Republic Act 11494 or the Bayanihan to Recover as One Act.

“Moreover, domestic liquidity in the system is already flush. We believe it would be more prudent for the government to first tap into this excess liquidity before engaging in additional borrowing from the BSP,” Arbis said.