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BSP cuts rates to record low

 

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) cut the overnight reverse repurchase (RRP) facility by 25 basis points (bps) to two percent – the lowest policy rate on BSP record — to boost market confidence and in support of economic recovery amid uncertainties of a resurgence in COVID-19 cases.

The BSP also reduced the interest rates on the overnight deposit and lending facilities to 1.5 percent and 2.5 percent.

“The Monetary Board assessed that there remains a critical need for continuing policy support measures to bolster economic activity and boost market confidence,” BSP Governor Benjamin E. Diokno said Thursday. “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 Deputy Governor Francisco G. Dakila Jr. gave the latest inflation forecast for 2020 which was higher at 2.4 percent compared to its previous (October 1 policy meeting) projection of 2.3 percent. For 2021 and 2022, the BSP lowered its forecasts to 2.7 percent (from 2.8 percent) and 2.9 percent (from three percent), respectively.

Dakila said they revised this year’s inflation estimate upwards due to the transitory impact of higher-than-expected inflation in September and October. Inflation increased to 2.5 percent in October because of the higher inflation for food and non-alcoholic beverage, both accounting for 38 percent of the consumer price index basket.

Prices of meat and fish also went up due to tightness in the supply of pork and adverse weather conditions in the case of fish. The BSP official also said that the recent typhoons’ impact on inflation has already been factored in on the latest estimates.

For the 2021 and 2022 forecasts, Dakila said these were lowered because of the impact of the lower domestic economic activity in the third quarter as well as lower crude oil prices and the appreciation of the peso.

The BSP has implemented a series of pandemic-induced aggressive policy rate cuts since February of a cumulative 200 bps. The real interest rates, which is below the inflation level, is in the negative territory.

Diokno said the balance of risks to the inflation outlook is still tilted on the downside from the potential impact of the pandemic on local and global economic activity. He noted that while “uncertainty remains elevated amid the resurgence of COVID-19 cases globally” the Monetary Board also observed its moderation.

“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,” said Diokno.

Diokno has said that he “anticipates interest rates to remain low, inflation to be manageable, the peso to be stable, and external accounts to be robust, with record-high gross international reserves (GIR).”

The central bank expects inflation rate to range at 1.75 percent to 2.75 percent for this year, and between two percent and four percent in 2021 and 2022.

With manageable inflation, the exchange rate has remained stable and in favor of the peso.

Diokno said the “strength of the (peso) remains market-driven and supported by sound macroeconomic fundamentals.” The local currency is one of the strongest currencies in Asia and has been consistently stable for the past four years. “The peso’s strength is attributable of the country’s low inflation, a strong and resilient banking system, low debt-to-GDP ratio, and a hefty GIR,” he said.


Source: Manila Bulletin (https://mb.com.ph/2020/11/19/bsp-cuts-rates-to-record-low/?utm_source=rss&utm_medium=rss&utm_campaign=bsp-cuts-rates-to-record-low)

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