Economist expects BSP to slash policy rates or RRR again

An economist said Wednesday the Bangko Sentral ng Pilipinas may be compelled to reduce further the reserve requirement ratios of banks or cut the policy rates to boost the economy amid the COVID-19 pandemic and following a series of destructive typhoons in the fourth quarter.

ING Bank Manila senior economist Nicholas Mapa cited the BSP’s recent move of rolling out an aggressive response to the pandemic, carrying out both conventional and unconventional easing measures.

He said BSP had slashed policy rates by 175 basis points and reduced reserve requirements by 200 bps with little impact on bank lending, which continued to decelerate as demand for new loans dried up given the elevated levels of unemployment and a bleak economic outlook.

“BSP has also jumped into unconventional methods to provide stimulus, conducting quantitative easing [via secondary market bond purchases] and de facto debt financing [via cash advances to the national government] which have led to a substantial spike in liquidity, with excess funds churning in the BSP facilities now at roughly P1.4 trillion,” he said.

Mapa said despite these efforts, the Philippines remained mired in recession amid the 10-month lockdown with the economy losing steam.

“Faced with dimming growth prospects and recognizing that fiscal help is not likely coming in the next few months, BSP Governor Diokno may be under pressure to provide whatever form of stimulus he can muster, although we are not optimistic it will do much in terms of stimulating loan growth,” he said.

The next policy meeting is scheduled on Nov. 19.

Mapa said the recent spate of typhoons might cause the fourth-quarter GDP to contract more severely than the third-quarter drop of 11.5 percent.

“Given the lack of aggregate demand, a more forceful fiscal response would be most efficient at this point, something that Governor Diokno will likely emphasize going forward,” Mapa said.

“We retain our call for a pause from BSP to limit a deepening of negative real policy rates but we do not discount Governor Diokno opting to provide some form of easing, either via a reduction in reserve requirements or a surprise 25-bps rate cut, to provide token stimulus amidst fiscal policy’s cost cutting efforts,” he said.

Topics: Bangko Sentral ng Pilipinas , BSP , policy rates , RRR , economy
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