BSP maintains record-low rates as pandemic pain persists

MANILA, Philippines – The Bangko Sentral ng Pilipinas maintained its key rate at historic-low on Thursday, saying it still has room to sustain its easy-money policy to help the pandemic-hit economy recover.

As widely expected, the powerful Monetary Board kept the central bank’s rate on overnight reverse repurchase facility at 2.0%. The policy rate, used by banks as a basis when charging interest for loans, has been unchanged since the 200-basis point cumulative rate cuts last year, which included the surprise 25-bp reduction last November.

The central bank said it still has space to keep borrowing costs low because of a “manageable inflation environment”, although it projects price growth to settle above the 2-4% annual target in 2021.

At its meeting, the Monetary Board revised its inflation forecast for this year to 4.4%, from 4.1% previously, due to “lingering supply-chain bottlenecks” that do not require any action from the BSP. This month, the BSP said inflation could accelerate to 5%.

“On balance, the Monetary Board is of the view that prevailing monetary policy settings remain appropriate given the manageable inflation environment and uncertain growth outlook,” BSP Governor Benjamin Diokno said in a statement.

“The Monetary Board reiterates that, together with appropriate fiscal and health interventions, keeping a steady hand on the BSP’s policy levers will allow the momentum of economic recovery to gain more traction by helping boost domestic demand and market confidence,” Diokno added.

Monetary authorities is hoping that the ultra-loose policy stance would aid economic recovery by spurring loan growth. But so far, bank lending remains weak amid risk-aversion among lenders, which are tackling a build-up in unpaid loans, while borrowers are still scared of incurring more debts at a time their income is bleeding.

In a commentary, Alex Holmes, Asia economist at Capital Economics, said that a struggling Philippine economy would likely force the BSP to keep its benchmark rates low. As it stands, Diokno is unfazed by hawkish signals from the US Federal Reserve, which has hinted of earlier-than-expected rate liftoff.

“The fact that the BSP left its main policy rate on hold at 2.00% today, despite the very weak state of the economy, suggests further easing is unlikely,” Holmes said.

 “While we are now taking out the cuts we had penciled into our forecast for this year, we think rate hikes are unlikely until 2023. In contrast, the consensus is expecting tightening next year,” he added.