BSP reduces interest rate to an all-time low of 2.25%

posted June 25, 2020 at 10:20 pm
by  Julito G. Rada
The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday reduced the benchmark interest rate by 50 basis points to an all-time low of 2.25 percent on expectations inflation will remain benign amid the coronavirus pandemic.

It was the third of such size of reduction this year, following the 50-bps cut in March and another 50-bps adjustment in April.

The interest rates on the overnight deposit and lending facilities were also reduced to 1.75 percent and 2.75 percent, respectively.

“Latest baseline forecasts indicate that inflation could settle near the low end of the target range of 3.0 percent ± 1 percentage [2 to 4 percent] point inflation for 2020 up to 2022, with inflation expectations remaining firmly anchored over the policy horizon,” the BSP said.

“Meanwhile, the balance of risks to the inflation outlook leans toward the downside from 2020 up to 2022 owing largely to the potential impact of a deeper and more disruptive pandemic on domestic and global demand conditions,” it said.

The Monetary Board said that domestic economic activity slowed with the enforcement of necessary protocols to contain the spread of the virus in the country. It said the outlook for global growth also deteriorated further as considerable uncertainty surrounded the extent of the health crisis.

“The Monetary Board noted that even as economies begin to reopen, the global recovery would likely be protracted and uneven. Hence, there remains a critical need for continuing measures to bolster economic activity and support financial conditions, especially the effective implementation of interventions to protect human health, boost agricultural productivity and build infrastructure,” it said.

It said that given these considerations, it decided that a further reduction in the policy rate amid a benign inflation environment would help mitigate the downside risks to growth and boost market confidence.

“Even as domestic liquidity dynamics and market function continue to improve owing to prior liquidity-enhancing measures, the Monetary Board believes that keeping an accommodative stance will further ease the cost of borrowing and ensure ample credit and liquidity in the financial system as the economy transitions toward recovery in the coming months,” it said.

The BSP said its support for the health and fiscal programs already being rolled out by the national government in responding to the needs of Filipino households and businesses.

It remained committed to deploying its full range of monetary instruments and regulatory relief measures as needed in fulfillment of its mandate to promote non-inflationary and sustainable growth.

The BSP also reduced the reserve requirement ratios of universal and commercial banks by 200 basis points to 12 percent earlier this year in an attempt to boost domestic liquidity. The 200-bps cut in RRR translates into P180 billion to P200 billion in additional liquidity to the financial system.

BSP Governor Benjamin Diokno said earlier he was aiming to cut the level of RRR to a single digit at the end of his term.

Inflation in May slowed to a six-month low of 2.1 percent from 2.2 percent in April, bringing the average in the first five months to 2.5 percent which was within the target range.

Economists from the First Metro Investment Corp. and University of Asia & the Pacific said inflation would not likely slow down below 2 percent in the second quarter despite the disruptions caused by the coronavirus disease 2019 to supply chains.

“Although aggregate demand will wane, this may not result in very low inflation rates [or deflation] because limitations on the supply side [i.e., limited output, disrupted supply chains, etc.] may have a stronger effect,” they said.

“Thus, we don’t expect inflation to go below 2 percent year-on-year in the second quarter,” they said.

Topics: Monetary Board , Bangko Sentral ng Pilipinas , Benjamin Diokno , interest , First Metro Investment Corp , domestic economic activity
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