The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday kept unchanged the overnight borrowing rate at a record low of 2.25 percent, taking into account the benign inflation and the 16.5-percent gross domestic product contraction in the second quarter amid the health crisis.
BSP Governor Benjamin Diokno said in an online briefing following the board meeting that the interest rates on the overnight deposit and lending facilities were also retained at 1.75 percent and 2.75 percent, respectively.
“The Monetary Board’s decision was based on its assessment that the inflation environment remains benign. While latest baseline forecasts have risen slightly due to the higher-than-expected inflation in July and recent increases in global crude oil prices, the future inflation path remains firmly within the government’s 2-4 percent target,” Diokno said.
“The balance of risks to the inflation outlook also leans toward the downside from 2020 until 2022 owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic. Meanwhile, inflation expectations remain broadly consistent with the inflation target,” he said.
The Monetary Board said the outlook for global economic growth remained subdued and uncertain amid the resurgence in COVID-19 cases in many jurisdictions. The MB noted the sharp contraction in domestic output in the first half, reflecting the impact of the enforcement of necessary measures to contain the spread of the virus in the country, according to Diokno.
“At the same time, the Monetary Board observed early signs of recovery in domestic economic activity with the gradual easing of lockdown restrictions, supported by ample liquidity in the financial system,” he said.
“Given these considerations, the Monetary Board is of the view that monetary policy settings remain appropriate for the time being. A prudent pause will enable the cumulative 175-basis-point reduction in the policy rate as well as other monetary and regulatory relief measures by the BSP to fully work their way through the economy, even as the national government continues to implement interventions to bolster economic activity and protect human lives and livelihoods,” he said.
BSP Deputy Governor Francisco Dakila said the board also revised the inflation forecasts made during the previous meeting for 2020, 2021 and 2020. For 2020, the inflation forecast was revised to 2.6 percent from 2.3 percent; 2021, to 3 percent from 2.6 percent; and 2022, to 3.1 percent from 3 percent previously.
“One of the major factors that led to the revisions was the higher inflation in June and July… although these inflation outturns were within our forecast range,” Dakila said.
ING Bank Manila senior economist Nicholas Mapa said that despite keeping policy rate untouched, the central bank opted to relax the cap of banks’ exposure to real estate from 20 percent to 25 percent in a bid to bolster loan activity.
“Monetary authorities will likely hold off on further rate cuts in 2020 and look to fiscal stimulus to complement the flurry of moves from the BSP to jump start economic growth. With the economy in recession and BSP likely running out of options to boost growth, fiscal authorities may need to front load expenditures to avoid another quarter of double digit contraction,” Mapa said.
The Department of Finance earlier said interest rates were expected to remain low amid the continuing benign inflation environment, a scenario that was good for businesses impacted by the COVID-19 pandemic.
Inflation moderately increased to 2.7 percent in July from 2.5 percent in June, but within the target range of 2 percent to 4 percent.