An economist said the decision of the Bangko Sentral ng Pilipinas to cut the key policy rates by 50 basis points on Thursday should be backed up by “massive fiscal stimulus”.
Bank of the Philippine Island chief economist Emilio Neri Jr. said that given the current situation where the onslaught of the coronavirus disease 2019 was threatening to slow the economy, “it [rate reduction] appears to be the appropriate response on the monetary front.”
“More importantly, this has to be complemented by a massive fiscal stimulus that will target key sectors and industries including health, travel, tourism but most specially the families that depend on daily wages,” Neri said.
Neri said that “most banks may need increased access to the BSP’s rediscounting facility and, in turn, keep credit lines open for their clients.”
COVID-19, which already claimed thousands of lives around the world, compelled the Duterte administration to implement a month-long enhanced community quarantine in Luzon until April 12, 2020. The country was also placed under a state of calamity.
The 50-bps cut in interest rates was the first time in more than 11 years since the BSP cut the policy rates by 50-bps to 5 percent on Jan. 29, 2009.
BSP Governor Benjamin Diokno said the Monetary Board also authorized the time-bound, temporary relaxation of BSP regulations on compliance reporting by banks, calculation of penalties on required reserves and single borrower limits.
It also approved a temporary reduction in the term spread on rediscounting loans relative to the overnight lending rate to zero. Diokno said the BSP would issue the detailed guidelines on these monetary measures and regulatory forbearance items.
Latest baseline forecasts indicate a lower path of inflation for 2020 and 2021, with inflation expectations remaining firmly anchored within the target range of 2 percent to 4 percent over the policy horizon, according to Diokno.
“Meanwhile, 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,” he said.
Inflation in February slowed to 2.6 percent from 2.9 percent in January, bringing the first two months’ average to 2.8 percent, below the target range.
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 would likely reduce economic growth in the near term.
COVID-19 also 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 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, Diokno said.
