BSP slashes rates by another 50 bps

MANILA, Philippines  — The Bangko Sentral ng Pilipinas (BSP) delivered yesterday another surprising and deep 50-basis-point cut in key interest rates to boost market confidence and further mitigate the downside risks to growth.

BSP Governor Benjamin Diokno said in a virtual press briefing that the Monetary Board’s decision to cut the key interest rates brought the overnight reverse repurchase rate to a record low of 2.25 percent.

The overnight deposit and lending rates were also reduced by 50 basis points to 1.75 percent and 2.75 percent, respectively.

 “The Monetary Board observed that domestic economic activity has slowed with the enforcement of necessary protocols to slow the spread of the virus in the country. At the same time, the outlook for global growth has deteriorated further as considerable uncertainty still surrounds the extent of the health crisis,” Diokno said.

Economists were expecting the central bank to keep interest rates unchanged to assess impact of previous monetary actions or at most a 25-basis point cut.

Diokno said the Monetary Board noted that the global recovery would likely be protracted and uneven even as economies begin to reopen.

 “Hence, there remains a critical need for continuing measures to bolster economic activity and support financial conditions, especially the effective implementation of interventions to protect human health, boost agricultural productivity and build infrastructure,” the BSP chief said.

The BSP chief also said the Monetary Board believes that keeping an accommodative stance would further ease the cost of borrowing and ensure ample credit and liquidity in the financial system as the economy transitions to recovery in the coming months.

The central bank reiterated its support for the health and fiscal programs being rolled out by the government in responding to the needs of Filipino households and businesses.

 “The BSP remains committed to deploying its full range of monetary instruments and regulatory relief measures as needed in fulfillment of its mandate to promote non-inflationary and sustainable growth,” Diokno said.

Diokno said the balance of risks to the inflation outlook leans toward the downside from 2020 to 2022 due largely to the potential impact of pandemic on domestic and global demand conditions.

BSP Deputy Governor Francisco Dakila Jr. said the central bank raised its inflation forecasts to 2.3 percent for this year and to 2.6 percent for next year due to rising world oil prices.

Inflation averaged 2.5 percent in the first five months after easing for four straight months to a six-month low of 2.1 percent in May, way within the two to four percent target set by BSP.

Nicholas Mapa, senior economist at Dutch financial giant ING Bank Manila, said the Monetary Board made the hefty 50-basis point rate cut as the economy braces for recession.

 “The surprise decision may be Governor Diokno’s last move for the year,” Mapa said.

UnionBank chief economist Ruben Carlo Asuncion said real interest rate – reverse repurchase rate less inflation – is now expected to be negative with the surprise cut.

 “I’m surprised indeed. But, I see this as a longer-term take by the central bank rather than a short-term reaction to the current crisis,” Asuncion said.

The BSP may ease policy further as the pandemic weighs heavily on the economy, London-based Capital Economicssaid.

“We doubt this will be the BSP’s last move,” said the macroeconomy research firm said.

BSP noted the “critical need” for continued measures to bolster economic activity as the lockdown had a massive impact on industrial production, exports and employment.

 “While the economy probably bottomed out last month, activity remains very depressed and is recovering slower than elsewhere,” Capital Economics said.