BSP could surprise the market a second time

After a surprised interest rate cut last month, the central bank’s Monetary Board may still decide to bring the policy rate to below two percent when it meets for the last time this year on December 17.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said Thursday that they continue to see a benign inflation path and this outlook allows the BSP “ample room to keep the monetary stance sufficiently accommodative” to cushion the “strong” downside risks to growth.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno (MB file)

“I can’t tell you whether we’re done with this rate cutting at this time,” he said when asked if the Monetary Board, which he chairs, is done with cutting interest rates after the November 19’s 25 basis points (bps) policy action, and if they could still surprise the market on December 17.

“Of course I cannot answer that. We usually get recommendation from the advisory committee (and) we have one more policy meeting. We will look at the most recent data and we’ll make a decision,” he said during his regular press chat, “GBED Talks”.

Diokno said it is critical for monetary policy to “ensure favorable financing conditions to support economic activity and market confidence” while the COVID-19 pandemic remains a concern, and this was why the BSP has reduced the policy rate by 200 bps since February to an all-time low of two percent as of November. “This is to shore up market confidence, reduce borrowing costs, and support the economic recovery amid a benign inflation outlook,” he said.

As of end-November, the BSP has also absorbed P1.9 trillion of bank liquidity via its term deposit facility, overnight deposit facility, reverse repurchase or RRP facility and securities facility.

With excess liquidity in the financial system, domestic interest rates have gradually declined. “The steady decline in the rates for the BSP’s term deposit facility, driven by oversubscriptions during our auctions, indicates that the financial system has been very liquid in recent months,” said Diokno.

Before the November 19 policy decision to cut rates anew, domestic market rates have been gradually easing following BSP’s rate reduction since February. Diokno noted that the 91-day Treasury bill rate and 3-month secondary market government securities rate have dropped by 217 bps and 212 bps, respectively, compared to end-2019 rates.

“However, bank lending rates have been slow to adjust, in part because of risk aversion and concerns on asset quality,” said Diokno, adding that banks prefer higher lending rates to offset risk and related operational costs. He also noted that the average lending rates of microenterprise loans and SME loans have declined compared to end-2019 levels.

“The slow adjustment in bank lending rates, together with bank risk aversion and weak loan demand, suggest that the impact of the BSP’s policy actions could take a longer time to materialize,” said Diokno.

The BSP said the weak market confidence continues to dampen the transmission from accommodative financing conditions to credit activity and private spending, however. And, as monetary policy actions typically work with a lag, the latest data on domestic liquidity and bank lending indicate that credit activity has remained tepid as banks remain generally cautious, while households and businesses remain reluctant to borrow, it added.

“Yet, even as BSP is prepared to implement additional policy measures, fiscal policy should play a more significant role in helping restore market confidence,” said Diokno. “Public health interventions remain vital to the whole-of-government approach against the impact of the pandemic. Fiscal programs will also need to address remaining supply bottlenecks, support domestic demand by extending wage subsidies and loans to support household incomes, and ensure employment for displaced workers as the country transitions to the New Economy.”

“Across the ASEAN, it appears that there could be scope for higher fiscal stimulus,” he added. “To note, the Philippines’ discretionary fiscal response to the COVID-19 crisis is relatively lower compared to our peers like Indonesia, Malaysia, and Thailand.”