Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the decision to continue to have an accommodative policy stance has more to do with managing long-term uncertainties during COVID-19 rather than inflation, which is under control.
(DBM / PIA / MANILA BULLETIN)
“With the lower rates, we can better manage longer-term uncertainties,” said Diokno. “At this point, inflation is not really our top issue. The policy rate move was premised on our reading of the macrofinancial situation rather than any outward indication that inflation will get out of hand.”
The Monetary Board has reduced the overnight reverse repurchase (RRP) four times in a row since February to 2.25 percent. The last policy move, which was to slash another 50 basis points (bps) to a cumulative 175 bps on June 25, surprised the market.
The BSP saw the impending recession and low inflation environment as enough reason to continue to cut rates. Diokno said it is an additional monetary stimulus, although it is not as immediate in terms of impact, unlike its provisional P300 billion loan to the government or reduction in banks’ reserve ratios. “By reducing the policy rate, it gives the economy extra boost,” he said. “We build resilience because we do not unnecessarily burden existing borrowers with higher debt servicing at the time when market uncertainty is high.”
Bringing the RRP to its lowest rate so far, should also discourage speculative funds. “The lower policy rate likewise reduces the incentive for hot money to come in, but only to take advantage of the interest rate differential between the Philippines and for example, US (rates),” added Diokno.
The BSP chief said the lower policy rate has also filtered down to bank levels.
“We have seen that there is pass-through from the policy rate to bank lending rate,” said Diokno. He said that how each bank relates to the policy rate will differ. “It will depend bank to bank because of differences in their own circumstances. However, we should clarify that the policy rate is a signal to the rest of the economy, and not just to banks, in the government’s securities market, (that) the yields have come off their peak in March.”
“That’s a benefit to those who seek fresh capital for the securities market,” said Diokno. And with reduced rates, the “pricing of term obligations likewise declines helping existing borrowers at this time of great difficulties.”
Diokno reiterates that BSP has a flexible monetary space to adjust both credit and liquidity conditions as needed.
The relatively benign inflation outlook has provided the BSP this policy space. As of end-June, inflation has averaged at 2.5 percent, within the government’s two-four percent target. For 2020, the BSP forecasts 2.3 percent inflation and 2.6 percent for 2021.