Subdued inflation fails to convince BSP to further ease
MANILA, Philippines — A slower inflation outlook was not enough to convince the Bangko Sentral ng Pilipinas (BSP) to deliver a new round of liquidity support to an economy struggling to recover from a devastating pandemic.
For the second straight month, BSP Governor Benjamin Diokno and his six colleagues at the Monetary Board, the central bank’s policymaking body, held off from lowering benchmark interest rates or bank reserves on Thursday. It’s a decision widely expected by the market.
“The Monetary Board is of the view that a continued pause will allow prior measures by the BSP to further work their way through the economy,” Diokno said in an online briefing.
As a result, overnight reverse repurchase rate, where banks peg their loan rates, will stay steady for 6 more weeks at a historic low of 2.25%. Overnight deposit rates would also remain at 1.75%, as well as overnight lending rate of 2.75%.
Economists have expected the decision and with two meetings to set policy left in the year, see no further adjustment from BSP. “We do not expect BSP to adjust monetary policy in the near term given that the real policy rate remains negative,” Nicholas Antonio Mapa, senior economist at ING Bank in Manila, said in an e-mail when sought for comment.
Indeed with inflation hovering at 2.5% for the first 8 months, a benchmark rate of 2.25% theoretically means earnings of bank deposits are no longer catching up with price costs. But BSP, under Diokno, has made it its mission to salvage the economy from the pandemic’s wrath by making it attractive for consumers to borrow and for banks to lend.
In that respect, Alex Holmes, Asia economist at Capital Economics, believes the central bank’s easing episodes are far from over. “We doubt the central bank has finished easing yet,” the economist said.
“While activity is now recovering, the country’s failure to contain the virus is holding back the recovery,” Holmes said in an e-mail.
Stable prices
Since February, BSP has cut policy rates by 175 basis points and reserves by 200 bps on top of other economy-boosting measures such as relaxing lending rules to small firms, as well as a fresh P540-billion infusion to the government strapped of cash revenues.
BSP Deputy Governor Francisco Dakila Jr. said monetary authorities were able to do all these things because of a subdued inflation environment that averaged 2.5% for the first 8 months, well within the official 2-4% target for the year.
What’s more, inflation is likely to slow down further this year and remain under control over the next 2 years. Latest BSP forecasts project inflation to average 2.3% year-on-year in 2020, down from 2.6% seen during the August 20 meeting.
Next year, Dakila said inflation may accelerate to 2.8%, albeit down from August’s forecast of 3%, before only hitting 3% on-year in 2022 due to low oil prices.
“We continue to see that the balance of risks remain in the downside over the policy horizon from 2020 to 2022,” he said, suggesting prices may actually rise slower than expected during those years.
Not lending
But not all is good in the present scenario. With interest rates low, thanks to a stable inflation, banks are having to rely to “cost-cutting measures” in order to remain profitable at a time borrowers are having difficulty paying up loans.
On top of that, BSP is not exactly getting what it wants from flooring interest rates because banks, afraid of getting unpaid, are also not lending enough.
“One of the things we observed from the data is that banks are increasing their provisions for losses. This could possibly be a result of anticipating some weakening in credit quality of borrowers…This can also account for continued risk aversion we are seeing in lending institutions,” BSP Director Dennis Lapid said in the same briefing.
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