BSP cuts policy rate to record low

THE Bangko Sentral ng Pilipinas (BSP) unexpectedly cut benchmark rates to new record lows on Thursday, the fifth reduction this year, citing the continued uncertainty caused by a fresh surge in coronavirus cases globally and the impact of recent typhoons on the struggling economy.

The Monetary Board on Thursday trimmed the rates on the BSP’s overnight reverse repurchase, lending, and deposit facilities by 25 basis points (bps) to 2%, 2.5%, and 1.5%, respectively.

“With a benign inflation environment and stable inflation expectations, the Monetary Board sees enough policy space for a reduction in the policy rate at this juncture to uplift market sentiment and nurture the country’s economic recovery amid increased downside risks to growth,” BSP Governor Benjamin E. Diokno said in an online briefing.

The latest easing move followed a “prudent pause” by the central bank since its June meeting. The central bank has already cumulatively lowered interest rates by 200 bps this year.

“The Monetary Board assessed that there remains a critical need for continuing policy support measures to bolster economic activity and boost market confidence,” Mr. Diokno said.

Mr. Diokno said uncertainty remains high amid a resurgence of coronavirus disease 2019 (COVID-19) cases around the world.

“However, the Monetary Board also observed that global economic prospects have moderated in recent weeks. At the same time, the Monetary Board noted that while domestic output contracted at a slower pace in the third quarter of 2020, muted business and household sentiment and the impact of recent natural calamities could pose strong headwinds to the recovery of the economy in the coming months,” he said.

BusinessWorld poll last week showed five out of 16 analysts expected the BSP to cut rates by 25 bps.

BSP Deputy Governor Francisco G. Dakila, Jr. said the latest easing will provide support to hasten the economy’s recovery by boosting bank lending.

“What this interest rate cut does is provide the impetus so that people will be much more likely to have confidence to get into the financial system again, when interest rates are on the accommodative side,” Mr. Dakila said.

Despite the BSP’s rate cuts earlier this year, lending growth eased to 2.8% in September, the slowest in more than 13 years or since the 2.4% seen in June 2007, as banks tightened their credit standards while borrowers’ confidence remained low due to the pandemic.

“So we emphasize that controlling the virus would be the most important factor that would lead to a pickup in the loan demand, but should that happen, the necessary liquidity is there in the system,” Mr. Dakila said.

INFLATION OUTLOOK REVISED
Meanwhile, the central bank upgraded its inflation forecast this year to 2.4% from the 2.3% it gave in the October meeting, Mr. Dakila said.

“We have revised it upwards by 0.1 percentage point due to the transitory impact of the higher-than-expected inflation in September end of this year,” Mr. Dakila said, noting higher inflation was seen in the food and non-alcoholic beverage component of the consumer price index.

On the other hand, the inflation outlook for 2021 and 2022 were lowered to 2.7% (from 2.8%) and 2.9% (from 3%), respectively, due to the slower-than-expected pickup in domestic activity, the decline in global crude oil prices, and the strengthening of the peso.

For UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion, the third- quarter gross domestic product (GDP) data may have been the crucial factor for the rate cut call.

“I guess the signs were on the wall: a lower-than-expected third-quarter GDP print, a quintet of unexpected destructive storms and a coronavirus that is still there. We expected a continuation of the BSP’s prudent pause, but it seems an overflow of warning signs may be too much to handle if a cut is not done,” he said in a text message.

GDP declined by 11.5% in the third quarter, slightly better than the record 16.9% contraction seen in the April to June period.

Analysts said near-term recovery prospects appeared bleaker.

“Despite the fresh round of easing, 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,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in a note.

Meanwhile, Alex Holmes, an economist from Capital Economics, said recovery prospects for the Philippines are still hinged on how well the government controls the spread of COVID-19.

As of Thursday, the Health department reported 1,337 new COVID-19 cases, bringing the total to 413,430.

“With the virus still not under control, restrictions will need to remain in place for longer, which will further hold back the recovery. Promising news on vaccine development looks unlikely to change the situation in the near term,” he said.

“Given the likely weakness of the economic recovery, we suspect the BSP will cut rates further next year.”