With low inflation and growth, and even lower interest rates, the central bank is faced with a negative real policy rate and officials said this is just a reflection of the Monetary Board’s accommodative policy stance.
“The prevailing policy interest rate reflects the accommodative monetary policy stance of the BSP (Bangko Sentral ng Pilipinas),” said BSP Governor Benjamin E. Diokno over the weekend.
A negative real interest rate territory happens when the inflation rate is higher or exceeds the nominal interest rate. With the BSP’s aggressive rates reduction since February that brought down the overnight reverse repurchase (RRP) facility to its lowest of 2.25 percent so far, the policy rate is now lower than the inflation rate of 2.5 percent, which is the average rate for the first seven months after July’s 2.7 percent (higher than 2.5 percent in June). For the year, the BSP’s inflation forecast is 2.3 percent and 2.6 percent for 2021. GDP growth in the second quarter also plunged to 16.5 percent. For the entire 2020, the inter-agency Development Budget Coordination Committee projected of negative 4.5 to 6.6 percent GDP.
Diokno reiterated that the Monetary Board has an accommodative monetary policy where it is expanding liquidity as economic stimulus. He said the current 2.25 percent RRP “represents the BSP’s efforts through monetary easing and liquidity-enhancing measures to support domestic economic activity by keeping the cost of borrowing affordable to households and firms for their capital or spending needs.”
“We believe that this would help stimulate consumer spending and production and facilitate economic recovery. Over the next several months, we expect improvements in domestic credit activity to lead to robust economic activity in the coming quarters,” he said.
Last Friday, the BSP reported both lower bank lending and money supply growth for June. Bank loans slowed to a growth of 9.6 percent from 11.3 percent in July because of limited economic activity during these COVID-19 lockdown periods. Domestic liquidity only expanded by 14.9 percent in June compared to 16.7 percent previously, again due to weak business prospects.
Assistant Governor Iluminada T. Sicat of the Monetary Policy Sub-Sector, said in releasing liquidity – about P1.3 trillion – in the midst of the pandemic, “the idea there is to bring down the interest rate to help the economy recover and support the financial system to return to its normal function. We’ve been very successful in that.”
“Although interest rate has been hovering downwards, it does not necessarily (mean it is) bad for the economy,” added Sicat.
Some of the released liquidity have gone back to the BSP via its open market operations such as the weekly auction of term deposit facility and increasing RRP volume.
Sicat said the intention is "not exactly to reduce liquidity” but to make sure that the short term policy interest rate is well guided. “By keeping enough liquidity, we make sure that market rates, particularly short term interest rates, are guided. But we remain to keep monetary policy accommodative," she explained.
BSP Department of Economic Research Director, Dennis D. Lapid, further explained that with a policy rate now negative in real terms merely reflects its accommodative monetary policy stance because of the “substantial amount of liquidity to the financial system (that BSP has provided) and that has helped to bring down interest rates in real terms.” This has also helped to keep the cost of borrowing affordable for businesses and household if they need to obtain credit for their working capital, he added.