Rates cut as uncertainties remain high

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    The Monetary Board yesterday decided to cut the key rates of the Bangko Sentral ng Pilipinas (BSP) by 25 basis points, saying “uncertainties remain elevated” both locally and globally.

    The interest rate on the overnight deposit now stands at 2 percent. The interest rates on the overnight deposit and lending facilities were likewise reduced to 1.5 percent and 2.5 percent, respectively.

    In a statement, BSP Governor Benjamin Diokno said the Monetary Board observed global economic prospects have moderated in recent weeks amid the resurgence of coronavirus disease 2019 (COVID-19) cases.

    Diokno said 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.”

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

    “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,” he added.

    Benign inflation

    But Diokno stressed latest baseline forecasts continue to indicate a benign inflation environment over the policy horizon, “with inflation expectations remaining firmly anchored within the target range of 2 to 4 percent.”

    “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,” Diokno said.

    Faster price increase for some food items like meat and fish caused inflation to slightly rise to 2.5 percent in October, data from the Philippine Statistics Authority showed.

    In September, inflation was at 2.3 percent while in October last year, inflation was posted at 0.8 percent.

    This brings the year-to-date inflation for 2020 at 2.5 percent, still near the low-end of the government’s full-year target range of between 2 and 4 percent.

    Karl Kendrick Chua, acting socioeconomic planning secretary, however, said upside risks such as the adverse impact of inclement weather and the lingering presence of the African swine fever remain.

    “Aside from the ongoing pandemic, the country has been facing adverse weather conditions in the recent months. Effects of typhoons and La Niña on the agriculture sector and food prices pose upside risks to inflation,” Chua said.

    He said while latest projections from the Department of Agriculture show that supply of key food products is likely to remain sufficient until the end of the year, agricultural damage may put food supply at risk, and thus put pressure on prices.

    Stimulus absent

    Nicholas Mapa, ING Bank senior economist, said the Monetary Board was “forced into action as fiscal stimulus is largely absent and may likely delay a sharp rebound in growth.”

    “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,” Mapa noted.

    He said the rates were reduced “in a bid to resuscitate falling bank lending and combat the economic recession.”

    “Although real policy rates are now even deeper into negative territory at -0.5 percent, the central bank pressed on with a fresh round of rate cuts as the fourth quarter GDP (gross domestic product) is now expected to worsen from the previous quarter’s 11.5 percent contraction,” Mapa said.

    He explained that agriculture and real property damage from a string of violent typhoons is expected to shave 0.15 percentage point off from the 2020 growth and “may have convinced Diokno to act while fiscal stimulus remains largely modest.”

    “The lack of fiscal stimulus may likely delay a sharp rebound in growth, which in turn will keep bank lending and investment appetite muted in the near term. We believe that BSP will likely pause at its December meeting now that real policy rates have fallen even deeper into negative territory with the central bank likely calling for a renewed push for additional fiscal spending to address the freefall in economic activity as COVID-19 infections remain elevated in the country,” Mapa said.