By Lee C. Chipongian
The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) has decided to implement an off-cycle policy rate reduction of 50 basis point (bps) to boost the economy overwhelmed by the rising number of COVID-19 cases.
Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno. (Bloomberg photo)
“(The) BSP cut key policy rate by 50 bps,” BSP Governor Benjamin E. Diokno announced Thursday. He said the emergency rate reduction will be effective today (April 17).
The BSP rate is now at 2.75 percent while the interest rates on the overnight deposit facility and the overnight lending facility is also reduced to 2.25 percent and 3.25 percent, respectively, according to Diokno.
The Monetary Board was supposed to meet on May 21 for its scheduled third of eight policy meetings for the year, but decided to implement an off-cycle cut.
The rate cut is the third time this year, and the third time in a row, that the Monetary Board slashed benchmark overnight reverse repurchase (RRP). The first 25 bps cut was on February 6 and the follow-up 50 bps reduction was March 19 while Luzon was already on lockdown due to the pandemic.
This brings the total rate cut to 125 bps.
The 2.75 percent BSP rate is the lowest since the BSP shifted to the interest rate corridor (IRC) system in mid-2016.
The RRP was three percent at the time of the IRC adjustments from four percent pre- IRC. However the shift to the IRC system was not a change of BSP policy stance since it is operational in nature and did not affect monetary policy settings.
Diokno has signalled last week that to manage a soft landing and to make sure that the “economic takeoff will begin quickly once the pandemic fades” the BSP would have to do a “deeper cut” and reduce the RRP below three percent. He has said that a recession could happen as an impact of the nationwide COVID- 19 lockdowns but after two quarters of negative growth, he is hoping the economy will bounce back by the third or fourth quarter this year.
More policy response
The central bank is focused on keeping domestic credit and liquidity sufficient to support loan growth amid the virus pandemic.
“(The) impact of COVID-19 on liquidity and credit conditions needs to be mitigated,” according to the minutes of the March 19 Monetary Board policy meeting.
“An easing of monetary policy could help prevent the tightening of domestic credit conditions that could further dampen economic growth,” said the Monetary Board. It noted that the “immediate impact of the spread of COVID-19 would adversely affect both firms (production and supply chain disruption, revenue losses) and individuals (unpaid leaves, pay cuts).”
“Amid this backdrop, additional policy support is warranted to ad¬dress debt servicing concerns of corporates as well as households through lower borrowing costs, thereby harnessing an adequate funding environment,” said the Monetary Board.
Domestic liquidity and bank lending reported growth in January, based on the latest BSP data on out-standing loans and money supply.
Big banks’ lending growth net of reverse repurchase placements with the BSP, grew by 11.6 percent year-on-year, more than the 10.9-percent growth in December 2019.