BSP delivers another 50-bps rate cut

FOR the third time this year, the Bangko Sentral ng Pilipinas (BSP) delivered a 50-basis-point rate cut to help lift economic conditions in the country.

The BSP announced on Thursday that the Monetary Board decided to cut the interest rate on its overnight reverse repurchase (RRP) facility by 50 basis points (bps) to 2.25 percent, effective Friday, June 26, 2020. The interest rates on the overnight deposit and lending facilities were reduced to 1.75 percent and 2.75 percent, respectively.

Mapa: “The surprise rate cut by the BSP will likely sap some appreciation pressure for the peso in the near term, which has enjoyed relative strength in recent weeks buoyed by financial account inflows tied to the government’s foreign borrowings.”

According to the statement, the cut was made in response to the Monetary Board’s observation that domestic economic activity has slowed with the enforcement of necessary protocols to slow the spread of Covid-19 in the country. At the same time, they also weighed the deteriorating outlook for global growth as considerable uncertainty still surrounds the extent of the health crisis.

“The Monetary Board noted that even as economies begin to reopen, the global recovery would likely be protracted and uneven. 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 said in a statement.

“Given these considerations, the Monetary Board decided that a further reduction in the policy rate amidst a benign inflation environment would help mitigate the downside risks to growth and boost market confidence,” it added.

Even as domestic liquidity dynamics and market function continue to improve owing to prior liquidity-enhancing measures, the BSP said keeping interest rates low will further ease the cost of borrowing and ensure ample credit and liquidity in the financial system as the economy transitions toward recovery in the coming months.

And the BSP has policy space to do so. In its statement, it reiterated that its latest baseline forecasts on inflation firmly anchored inflation expectations over the policy horizon.

The BSP’s latest forecast is for average inflation to hit 2.2 percent for this year and 2.5 percent for next year. Inflation currently averages at 2.5 percent, based on data for the first half of the year. This means the BSP expects slower inflation numbers in the second half of 2020.

“Meanwhile, the balance of risks to the inflation outlook leans toward the downside from 2020 up to 2022 owing largely to the potential impact of a deeper and more disruptive pandemic on domestic and global demand conditions,” the BSP said.

That’s it for now

While the BSP has been known to be aggressive in flushing the economy with accommodative measures since the start of the government’s pandemic response, ING Bank Manila economist Nicholas Mapa believes the BSP will stop hiking rates and easing reserve requirement ratios (RRRs) after this latest move.

“After the flurry of rate cuts and infusion of liquidity, today’s move may be the last from the BSP in 2020 with [BSP Governor Benjamin] Diokno likely in favor of approximating positive real policy rates. Meanwhile, Governor Diokno will also likely hold back on reducing reserve requirements in the near term given that the financial system is swamped with liquidity with excess funds parked at BSP’s deposit facilities hitting roughly P1.3 trillion in June,” Mapa said.

“The surprise rate cut by the BSP will likely sap some appreciation pressure for the peso in the near term, which has enjoyed relative strength in recent weeks buoyed by financial account inflows tied to the government’s foreign borrowings.  Meanwhile, the local bond market may benefit from the Central Bank easing, offsetting some concerns about additional bond supply in the near term after the government posted another substantial budget deficit for the month of May,” he added.

In its first monetary policy-setting meeting for the year in February, the BSP cut its rates by 25 basis points. In its March meeting, the BSP cut its rates anew, this time by 50 basis points. Due to the pandemic, BSP Governor Benjamin Diokno called for an unscheduled monetary policy meeting in April to cut rates anew by 50 basis points.


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