Low rates likely until 2022 – BSP

MANILA, Philippines — The Bangko Sentral ng Pilipinas may keep a low interest rate environment until end-2022 to help the country fully recover from the impact of the pandemic, BSP Governor Benjamin Diokno said.

In an interview with Bloomberg Television, Diokno said the BSP still has some monetary space available despite cutting the benchmark rate by a total of 200 basis points this year, which brought the overnight reverse repurchase rate to an all-time low of two percent.

“So we’re not at the end of the line, but I think this is the time for another pause because after all we’ve been very aggressive. We have cut the monetary policy rate by a total of 200 basis points or two percentage points this year. Now, interest rate in the Philippines is at its lowest rate ever,” Diokno said.

The Monetary Board took another prudent pause and kept interest rates steady last Dec. 17 after a surprise 25-basis points rate cut  on Nov. 19.

“We made a policy decision that we will keep the rates at this level until the economy has fully recovered to the previous level of maybe 6.5 to 7.5 percent and unemployment is down to the five percent range. So we plan to keep this low interest rate for long, maybe toward the end of 2022,” Diokno said.

Economic managers, through the Development Budget Coordination Committee (DBCC), now see a deeper GDP contraction of 8.5 to 9.5 percent this year before bouncing back with a GDP growth of 6.5 to 7.5 percent in 2021 and 8.5 to 10 percent in 2022.

“We expect the fourth quarter performance to be slightly negative, but we are hoping that the first quarter 2021 economic performance will be positive. And we expect the economy to grow by 6.5 to 7.5 percent starting next year and there will be a stronger recovery in 2022. Our expectation is that we will be back to where we were in 2019 by the middle of 2022,” Diokno said.

The country’s unemployment rate improved to 10 percent in July from a record 17.7 percent in April.

The Monetary Board earlier raised its inflation forecasts to 2.6 percent this year and to 3.2 percent for next year due to the sharp increase in global crude oil prices and the higher-than-expected food inflation in November.

Inflation accelerated to a 21-month high of 3.3 percent in November from 2.5 percent in October, bringing the average to 2.6 percent from January to November. This was the fastest since the 3.8 percent booked in February 2019.

“We are confident that inflation remains benign, and that future inflation path will remain firmly within the government’s two to four percent target over the policy horizon,” Diokno said.

As a result, the real interest rate remained in negative territory as the benchmark rate stood at two percent versus the average inflation of 2.6 percent from January to November.

“Having a real negative interest rate is not new to the Philippines. We’ve had so many episodes of that in the past. And so that should not be a major constraint. We really want the economy to recover. I can assure you we won’t go to the unconventional negative interest rate regime for so long,” he said.

The BSP chief reiterated that the current monetary policy setting remains appropriate at the moment, as an accommodative stance together with fiscal initiatives would quicken the transition of the economy towards sustainable recovery.

The central bank has been doing all the heavy lifting to soften the blow of the COVID-19 pandemic on the economy, unleashing P1.9 trillion in additional funds through various liquidity enhancing measures.

Aside from the 200 basis points rate cuts, the BSP has lowered the reserve requirement ratio for banks, extended a P540 billion provisional advance to the national government, entered into a P300 billion repurchase agreement with the Bureau of the Treasury, and purchased government securities in the secondary market.