RECOGNIZING the negative effects brought by the coronavirus disease 2019 (COVID-19) to the economy, the Monetary Board yesterday released a number of monetary tools starting with the reduction of the key rates of the Bangko Sentral ng Pilipinas (BSP).
The Monetary Board decided to cut the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 50 basis points (bps) to 3.25 percent, effective today, March 20.
The interest rates on the overnight lending and deposit facilities were also reduced to 3.75 percent and 2.75 percent, respectively.
Central banks lower interest rates to encourage borrowing and investing, thereby possibly stimulating economic growth. But this may hasten inflation.
Rates are raised, meanwhile, when there is too much growth. Higher borrowing rates slow inflation and return growth to more sustainable levels.
In addition, the Monetary Board authorized the time-bound, temporary relaxation of BSP regulations on compliance reporting by banks, calculation of penalties on required reserves, and single borrower limits.
The Monetary Board also approved a temporary reduction in the term spread on rediscounting loans relative to the overnight lending rate to zero.
Benjamin Diokno, BSP Governor, said although inflation expectations remain firmly anchored within the full-year target range of between 2 and 4 percent, he said the decision was meant to combat the negative effects of COVID-19, which has recently been declared as a pandemic.
“The balance of risks to the inflation outlook now leans toward the downside for both 2020 and 2021. The uncertainty over the potentially protracted pandemic poses significant downside risks to aggregate demand,” Diokno said.
He said average inflation is seen to settle at 2.2 percent in 2020 and 2.4 percent in 2021. The latest forecasts are (substantially) below the February monetary policy meeting projections of 3.0 percent for 2020 and 2.9 percent for 2021 due to lower-than-projected inflation outturns in recent months, a sharp decline in global crude oil prices, and the adverse effects of the 2019 novel coronavirus disease (COVID-19) on global and domestic economic activity.
“The Monetary Board noted that while the enforcement of quarantine measures could help in slowing the spread of the virus, the resulting disruptions to industries and private spending are likely to reduce economic growth in the near term,” Diokno added.
Moreover, Diokno said COVID-19 has likewise dampened prospects for the global economy, “which could negatively impact tourism and trade, Overseas Filipino remittances, and foreign investments.”
“Given these considerations, the Monetary Board decided that there is a need for a follow-on monetary policy response to address the adverse spillovers associated with the ongoing pandemic. With a manageable inflation environment and stable inflation expectations, the Monetary Board sees enough policy space for an assertive reduction in the policy rate at this juncture to cushion the country’s growth momentum and uplift market confidence amid stronger headwinds,” Diokno said.
The monetary policy easing, according to the central bank chief, is also “aimed at mitigating the risk of financial sector volatility in light of unfolding global developments by ensuring adequate domestic liquidity and credit in the financial system as well as lowering borrowing costs for affected firms and households.”
He also stressed that the Monetary Board also recognizes that the health and safety of the Filipino people remain the government’s foremost priority.
“In this regard, the Monetary Board reiterates its support for urgent and carefully coordinated measures with other government agencies to alleviate the spillover effects of the pandemic on people and firms, with a view toward preventing any long-lasting economic and social damage.”
Nicholas Antonio Mapa, ING Bank senior economist, said the move was expected by market players.
“Given the imminent downturn in economic activity and the softening of the inflation outlook due to the drop in global crude oil, the BSP was afforded even more scope to cut policy rates,” Mapa said.
But he stressed that despite the move by the central bank, the economic outlook remains dim with the bulk of the economy shuttered due to the enhanced community quarantine.
“Lower rates would do little to ignite loan demand given that more than half of the workforce is holed up in their homes given strict curfews and restrictions for movement. With the central bank moving aggressively, we now await additional action on the fiscal front with the government rolling out a mere COVID-19 fiscal stimulus package worth $27 billion, roughly 0.1 percent of GDP,” Mapa said.
He said they also expect the BSP to roll out additional measures to ease liquidity conditions further such as the lowering of the term deposit facility volumes and or reductions to banks’ reserve requirements in the near term.
“In times of uncertainty, economic agents will likely want to hold on to cash with banks required to remain open to service withdrawals,” Mapa said.
