On BSP rate cut: Act now rather than later – Diokno


Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the off-cycle rate cut will “strongly encourage lending to various sectors” particularly vulnerable businesses hit by the COVID-19 outbreak.

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno. (Bloomberg photo) Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno. (Bloomberg photo)

“Knowing that monetary policy works with a lag, it is better for the Monetary Board to act now rather than later,” said Diokno.

He also confirmed that the scheduled May 21 policy meeting is now cancelled. The next Monetary Board policy meeting, its fourth for 2020, is on June 25. There are only eight policy meetings in a year.

Since monetary policy works with a lag – about 12 to 18 months – Diokno said it is “the sense of the Monetary Board that a cut of 125 basis points (bps) for the first half of the year is appropriate. We continue to monitor domestic and international developments, however.”

An off-cycle cut is “more an exception than the rule,” he noted. “There are five more scheduled Monetary Board meetings for the rest of the year — the fourth one on June 25 and the eighth and final one on December 17.”

On April 16, in an emergency decision, the seven-man Monetary Board chaired by Diokno, decided to cut the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 50 bps to 2.75 percent, effective April 17. The overnight lending is also reduced to 3.25 percent while deposit rate is now at 2.25 percent.

This is the third time in a row that the BSP reduced interest rates. The first was on February 6 when it cut RRP by 25 bps, and then again on March 19 by 50 bps.

At 2.75 percent RRP, this is the lowest BSP rate on recorded history or at least since 2001.

On June 3, 2016, the BSP shifted its monetary operations to an interest rate corridor (IRC) system which singled the BSP policy interest rate which is the RRP. The IRC was intended to guide money market rates to move closer to the RRP.

Under the IRC, central bank instruments and open market operations were calibrated, such as the overnight lending facility, the overnight deposit facility, the term deposit facility (TDF) and the RRP.

The overnight RRP rate was adjusted to three percent from four percent pre-IRC but it was not technically a monetary policy move. It is because of the IRC that the BSP was able to reduce banks’ reserve requirement ratio from 18 percent in 2017 to 12 percent as of March 30 this year, since with the TDF, there was better pricing of short-term rates and it was a more effective liquidity mopping tool.