BSP surprises market with 25-bps rate cut

21-Nov-2020 Intellasia | PhilStar | 6:02 AM Print This Post

The Bangko Sentral ng Pilipinas (BSP) resumed yesterday its easing cycle, delivering a surprise 25-basis-point interest rate cut as the country slipped deeper into recession amid the resurgence of COVID-19 cases globally.

In a virtual press conference, BSP Governor Benjamin Diokno said the Monetary Board decided to lower the overnight reverse repurchase rate to an all-time low of two percent.

Likewise, the overnight deposit and overnight lending rates were reduced to 1.50 percent and 2.50 percent, respectively.

Diokno said uncertainty remains elevated amid the resurgence of COVID-19 cases globally.

Although global economic prospects have moderated in recent weeks, the BSP chief said domestic output contracted at a slower pace in the third quarter.

The country’s gross domestic product (GDP) contracted by 10 percent from January to September as the economy stalled following the government’s decision to place Luzon under lockdown in mid-March to contain the spread of the virus.

The GDP shrank by 11.5 percent in the third quarter, a record 16.9 percent in the second quarter, and 0.7 percent in the first quarter.

“The Monetary Board noted that while domestic output contracted at a slower pace in the third quarter of 2020, muted business and household sentiment and the impact of recent natural calamities could pose strong headwinds to the recovery of the economy in the coming months,” Diokno said.

On the other hand, Diokno said the balance of risks to the inflation outlook also remains tilted toward the downside due largely to potential disruptions to domestic and global economic activity amid the raging pandemic.

“Given these considerations, the Monetary Board assessed that there remains a critical need for continuing policy support measures to bolster economic activity and boost market confidence,” the BSP chief said.

With a benign inflation environment and stable inflation expectations, Diokno said the Monetary Board sees enough policy space for a reduction in the policy rate at this juncture to uplift market sentiment and nurture the country’s economic recovery amid increased downside risks to growth.

BSP deputy Governor Francisco Dakila Jr. said the country’s GDP is expected to contract anew in the fourth quarter, prompting the monetary authorities to keep an accommodative policy stance in the coming months.

“We are also looking at possible downside risks to economic activity that have increased coming from the potential impact in the resurgence of COVID-19 cases that we’ve seen across the globe and these are continuing to feed uncertainty and dampen market sentiment,” Dakila said.

Dakila said the 25-basis point cut would help shore up market sentiment as the country brace itself for the possible downside risks arising from the resurgence of COVID-19 cases.

“On a year-on-year basis, we are still expecting the economy to contract in the fourth quarter although this will be at a much more moderate rate. The recovery will begin in 2021 and continue on up to 2022,” Dakila said.

Dakila said the Monetary Board also decided to raise its inflation forecast to 2.4 percent this year because of higher inflation rates for September and October as food prices continued to rise due to tightness in pork supply amid the African swine fever, as well as fish due to adverse weather conditions.

Dakila also said the inflation forecast for 2021 was lowered to 2.7 percent and for 2022 to 2.9 percent because of slower domestic economic activity, particularly in the third quarter.

Dakila said the latest assessment has considered the impact of Typhoons Rolly and Ulysses on economic activity.

Nicholas Mapa, senior economist at ING Bank Manila, said the rate cut aims to resuscitate falling bank lending that hit a 13-year low of 2.8 percent in September and combat economic recession.

“Despite the fresh round of easing, we are not confident that bank lending will pick up anytime soon given the dimming growth outlook with unemployment elevated and consumer sentiment still negative. Meanwhile, the lack of fiscal stimulus may likely delay a sharp rebound in growth, which in turn will keep bank lending and investment appetite muted in the near term,” Mapa said.

Although real policy rates are now even deeper into negative territory at 0.5 percent, Mapa said the central bank pressed on with a fresh round of rate cuts as fourth GDP is now expected to worsen from the 11.5 percent contraction in the third quarter.

“We believe that BSP will likely pause at its December meeting now that real policy rates have fallen even deeper into negative territory with the central bank likely calling for a renewed push for additional fiscal spending to address the freefall in economic activity as Covid-19 infections remain elevated in the country,” Mapa said.

For his part, Security Bank chief economist Robert Dan Roces said the lower-than-expected GDP figure in the third quarter, a quintet of unexpected destructive storms and a coronavirus that is still there led to the rate cut.

“BSP may have seen these as enough drivers to cut 25 basis points, bringing this year’s total rate reduction to a total of 200 basis points. We expected a continuation of the BSP’s prudent pause, but it seems, just like the Magat Dam’s need to release water that flooded the plains of Isabela and nearby Cagayan, an overflow of warning signs may be too much to handle,” Roces said.

https://www.philstar.com/business/2020/11/20/2058077/bsp-surprises-market-25-bps-rate-cut

 

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