The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday cut the policy interest rates by 50 basis points to 3.25 percent effective March 20 to support the economy amid the onslaught of the coronavirus disease 2019.
The disease that originated in China compelled the government 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 was the first time in a single board meeting 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, who tested negative of COVID-19, said in a statement released to reporters in the absence of the usual policy briefing that the interest rates on overnight lending and deposit facilities were also reduced to 3.75 percent and 2.75 percent, respectively.
“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,” Diokno said.
The Monetary Board 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 by the close of business March 19.
“Latest baseline forecasts indicate a lower path of inflation for 2020 and 2021, with inflation expectations remaining firmly anchored within the target range [2 percent to 4 percent] over the policy horizon. Average inflation is seen to settle at 2.2 percent in 2020 and 2.4 percent in 2021,” Diokno said.
He said the latest forecasts were substantially below the February monetary policy meeting projections of 3.0 percent for 2020 and 2.9 percent for 2021 following the lower-than-projected inflation outturns in recent months, a sharp decline in global crude oil prices and the adverse effects of COVID-19 on global and domestic economic activity.
“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 further slowed to 2.6 percent from 2.9 percent in January, bringing the first two months’ average to 2.8 percent.
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 were likely to 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.
He 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 and lowering borrowing costs for affected firms and households.
“The Monetary Board also recognizes that the health and safety of the Filipino people remains 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,” he said.
He said the BSP would remain data-driven as it considers a range of other supplementary measures that may be required to support non-inflationary and sustainable growth over the medium term.
He said the supplemental actions may include, but are not limited to, recalibrating the interest rate corridor settings; reducing the reserve requirement ratios; suspending the term deposit facility auctions; and ensuring access to liquidity-enhancing facilities such as the rediscounting windows.
“The BSP is prepared to use its full range of monetary instruments and to deploy regulatory relief measures as needed in fulfillment of its price and financial stability mandates,” Diokno said.
ING Bank Manila senior economist Nicholas Mapa said the BSP’s move was expected by market players, as the number of confirmed virus cases accelerated with the national government ordering an enhanced community quarantine in Luzon, which accounts for 74 percent of the gross domestic product.
“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.
Mapa said despite the move by the BSP, the economic outlook remained 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,” Mapa said.
“We 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 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,” he said.
“Bond yields will likely look past this move by the BSP and take direction from global events while the peso may face weakness on the dimming outlook with economic activity on pause,” Mapa said.