Economists expect no change in interest rates

MANILA, Philippines — Bank economists see the Bangko Sentral ng Pilipinas (BSP) taking a prudent pause on Thursday to assess the impact of aggressive monetary easing, including the surprise 25 basis points rate cut last month, on the country’s ailing economy.

Security Bank chief economist Robert Dan Roces said the BSP’s Monetary Board is likely to keep interest rates steady during its last rate-setting meeting for the year scheduled on Dec. 17.

“The Monetary Board would likely reassess the inflation path and also see how the recent policy cut is absorbed in the system,” Roces said.

To soften the impact of the coronavirus disease 2019 or COVID-19 pandemic, the BSP has been doing all the heavy lifting by slashing interest rates by 200 basis points to an all-time low of two percent, lowering the reserve requirement ratios for banks, extending P540 billion provisional advance to the national government, entering into a P300 billion repurchase agreement with the Bureau of the Treasury settled last Sept. 29 and purchasing government securities in the secondary market.

The BSP delivered a surprise 25 basis points rate cut last Nov. 19 to help the struggling economy bounce back as the gross domestic product (GDP) shrank 10 percent from January to September, including the record 16.9 percent contraction in the second quarter.

“Rate action, if any, and forward guidance more likely after the 4 Q GDP release in February next year,” Roces said.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., also sees the BSP keeping the benchmark interest rate unchanged but  may deliver a 200 basis points cut in the reserve requirement ratio (RRR) for big banks.

“Local monetary easing measures since the COVID-19 lockdowns have been pre-emptive in nature. For instance, the cumulative cut of 200 basis points in local policy rates has been one of the most aggressive among major central banks worldwide,” Ricafort said.

Ricafort explained the two percent overnight reverse repurchase rate is now unusually below inflation rate that averaged 2.6 percent from January to November resulting to negative net interest rates and making any further cut in policy rates more challenging at the moment.

“However, inflation could still remain relatively benign in the coming months and would still support and justify more monetary easing measures, especially any further moves to reduce large banks’ RRR from the current 12 percent that would infuse more liquidity into the financial system,” Ricafort said.

ING Bank senior economist Nicholas Mapa assures BSP Governor Benjamin Diokno will hit the pause button for now.

“As you noted inflation saw an uptick and we may see this linger a little longer as food price spikes tend to be sticky downward. And although I do think that the spike in prices will fade eventually as demand side pressure remains subdued given the recession,” Mapa said.

Mapa said the BSP must still be cognizant of the fact that real policy rates have turned substantially negative and could still be mindful of the financial system stability as well as price stability but with the economy mired deep in recession.

“(Governor) Diokno will continue to have an eye on helping out where he can in terms of monetary support. Should the economy remain painfully weak and fiscal authorities absent in terms of stimulus, BSP may be pressured to cut policy rates by mid 2021 but this would be an extreme scenario,” Mapa said.

On the other hand UnionBank chief economist Ruben Carlo Asuncion said the BSP could lean on the lackluster third quarter unemployment print to justify another 25 basis points monetary policy cut.

“There was precedent set by the recent BSP surprise rate cut last November right after the lower-than-expected 3Q20 GDP growth rate, but, note that, the recent Labor Force Survey release is lagged data, which means that what was known then, may no longer be true now,” Asuncion said.

According to Asuncion, it is suspected that the Monetary Board would patiently wait for the 4Q20 GDP growth rate release in February and at the same time monitor more forward-looking economic indicators to better ascertain the shape of the economic recovery.