Unexpected BSP rate cut fulfills Diokno's 'whatever it takes' pledge
MANILA, Philippines — The aggressive easing episode of the Bangko Sentral ng Pilipinas (BSP) was not over yet after it unexpectedly slashed policy rates to fresh record-lows on this year’s penultimate meeting to assist an economy struggling to bounce back from historic slump.
Sans a convincing fiscal push, BSP Governor Benjamin Diokno cemented his pledge to do whatever it takes to salvage the economy with another cut of 25 basis points in the overnight reverse repurchase rate to 2%. The overnight lending and deposit rates were also lowered accordingly.
“The Monetary Board assessed that there remains a critical needs for continuing policy support measures to bolster economic activity and boost market confidence,” Diokno said in a statement after the meeting of the policymaking body.
Thursday’s surprise rate cut, which came after two straight months of pauses, meant that rates have so far gone down by 200 basis points this year, a testament to Diokno’s resolve to pump prime an economy that contracted 10% in the first 3 quarters, the worst in Asean-5.
There is one rate-setting meeting left on December 17, and Alex Holmes, Asia economist at Capital Economics, said in an e-mail “further easing is likely.”
The latest relaxation in monetary policy came weeks after third quarter data showed the economy slumped a larger than expected 11.5% on-year. While easing from a record 16.5% in the previous quarter, the result showed a deeper climb for the economy to at least narrow output losses to just 6% this year, a government target now under review.
By lowering benchmark rates, Diokno and his six peers at the Monetary Board is trying to prompt banks to lower their loan interest rates and more than that, entice borrowers to secure bank credit and fund economic activities from expanding businesses to purchasing property. They have so far not succeeded despite early rate cuts with lending growth at slowest in over 13 years in September.
Fresh reduction in policy delivered Thursday and in the future are unlikely to make any difference. Nicholas Antonio Mapa, senior economist at ING Bank in Manila who foresaw a cut, said BSP’s options to turn the economy around are fast running out.
“We are not confident that bank lending will pick up anytime soon given the dimming growth outlook with unemployment elevated and consumer sentiment still negative,” Mapa said in a commentary.
It also does not help that Diokno is not getting enough support from his former colleagues at the Duterte Cabinet, which have restrained from spending for fears of ballooning the budget deficit. Infrastructure spending, touted as a recovery strategy, was down 10.5% year-on-year in September, and about 3% below target.
Mapa said government's hesitation to spend would only “delay a sharp rebound in growth” expected for next year.
While growth remains uncertain and therefore the need for credit too, BSP Deputy Governor Francisco Dakila Jr. said the central bank’s dovish actions are meant to ensure liquidity is there once needed.
“We emphasized that controlling the virus will be the most important factor to pick up the demand and if that should happen, the necessary liquidity is there in the system and what BSP has done is to create an enabling environment for recovery in the economy,” he explained in a briefing.
For now, dismal demand is at least bringing the upside of slow inflation that grants BSP more space to act. Consumer prices are seen to rise 2.4% this year, up slightly from October 1 forecast, but still at the low end of the BSP’s 2-4% target. Inflation averaged 2.5% as of October.
In 2021 and 2022, inflation is likely to hit 2.7% and 2.9%, respectively, although projections were down from 2.8% and 3%.
“For the most part, the surprise cut today underscores the long road ahead for a full recovery,” Miguel Chanco, senior Asia economist at Pantheon Macroeconomics, said in an online exchange.
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