Bangko Sentral makes surprise rate cut as economic slump continues

by ABS-CBN News, 19 Nov 2020

MANILA – The Bangko Sentral ng Pilipinas made a surprise 25 basis points policy rate cut on Thursday, bringing the overnight reverse repurchase facility to a new historic low of 2 percent.

This is the central bank’s fifth rate cut this year as it saw the need for further easing to shore up the economy amid the series of typhoons and a resurgence in global coronavirus cases.

The interest rates on overnight deposit and lending facilities were also slashed to 1.5 percent and 2.5 percent, respectively. The new rates are effective on Friday.

The rate cut was unexpected as the BSP earlier said that it was in no rush to further reduce borrowing costs despite the economic slump caused by the COVID-19 pandemic.

“There remains a critical need for continuing policy support measures to bolster economic activity and boost market confidence,” the BSP said in a statement.

BSP not rushing to cut rates despite steep GDP contraction in third quarter

The last time that the central bank adjusted rates was in June, when it cut rates by 50 basis points, amid expectations that the economy was in for a record slump due to the COVID-19 pandemic.

The BSP has reduced interest rates by a cumulative 200 basis points this year, and cut the reserve requirement ratio (RRR) for banks by 200 basis points to 12 percent. Diokno has also said he was given the authority to cut RRR further to 10 percent.

Policy will remain accommodative in the coming months and the timing of an exit from unprecedented easing measures will depend on inflation and pace of economic recovery, it said.

“The balance of risks to the inflation outlook also remains tilted toward the downside owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic,” the BSP said.

Despite further policy easing, inflation is not a concern for the Bangko Sentral, with the latest forecasts indicating expectations are firmly anchored within the 2 to 4 percent target band for 2020 up to 2022 amid weak domestic activity.

The BSP revised its inflation forecasts to 2.4 percent for this year, from 2.3 percent previously, and to 2.7 percent for next year, from 2.8 percent. Inflation in 2022 was projected at 2.9 percent versus 3 percent previously.

But while the central bank has been trying to entice businesses and consumers to borrow more money to prop up the economy, banks have become more reluctant to lend due to worries that borrowers may not be able to repay their loans.

The BSP’s third quarter survey of senior bank loan officers showed that banks are tightening credit standards–making it harder to borrow money by raising collateral and other requirements.

The Philippine economy has contracted an average of 9.7 percent in the first three quarters of the year, as the Philippines struggled to control the spread of COVID-19.

–with a report from Reuters