By Melissa Luz Lopez, March 19, 2020; CNN Philippines
Metro Manila (CNN Philippines, March 19) — The Bangko Sentral ng Pilipinas (BSP) slashed interest rates by half a percent on Thursday, in a bid to spur the economy amid the slowdown due to the novel coronavirus outbreak.
BSP Governor Benjamin Diokno announced that the Monetary Board pulled down the key interest rate to 3.25 percent, 50 basis points (bp) lower than the current level to lower cost of borrowings that can in turn encourage more business activities that could soften the impact of the coronavirus.
“With a manageable inflation environment and stable inflation expectations, the Monetary Board sees enough policy space for an assertive reduction in the policy rate at this juncture to cushion the country’s growth momentum and uplift arket confidence amid stronger headwinds,” Diokno said in an statement via e-mail.
The overnight deposit and lending rates were likewise trimmed to 2.75 percent and 3.75 percent, respectively, effective Friday, March 20.
Banks and other lending firms use the BSP’s rates as their benchmark in setting loan, credit card, and deposit rates.
Thursday’s rate-setting meeting proceeded as scheduled despite an “enhanced community quarantine” over the entire Luzon, which only exempted workers in critical industries like healthcare, food supplies, and banks from the travel restrictions.
The central bank said latest forecasts show a slower pace of price increases this year and in 2021, and would likely fall well within the 2-4 percent target band. The huge drop in oil prices, coupled with the global and local economic slowdown due to COVID-19 would keep inflation lower than 3 percent, the BSP said.
Last month, the BSP rolled out a “preemptive” 25 bp rate cut, which was meant to support market confidence as accelerating inflation as well as rising COVID-19 cases worldwide spooked investors.
“The Monetary Board noted that while the enforcement of quarantine measures could help in slowing the spread of the virus, the resulting disruptions to industries and private spending are likely to reduce economic growth in the near term,” Diokno added, noting that the outbreak could also hurt tourism, remittances from overseas Filipinos, and foreign investments.
“The Monetary Board decided there is a need for a follow-on monetary policy response to address the adverse spillovers associated with the ongoing pandemic.”
This is now the fifth easing move of the BSP meant to gradually unwind the 175 basis-point rate hikes it unleashed in 2018.
Diokno also announced other relief measures such as a “time-bound” and temporary relaxation of BSP rules on reporting of banks, calculation of penalties on bank reserves, and borrowing limits for a sole customer. Rediscount loans, or short-term debts taken by banks to cover unexpected withdrawals or loan applications, have also been reduceed to zero.
Foreign central banks have intercepted the COVID-19 pandemic by trimming interest rates there. The United States Federal Reserve led the charge with two off-cycle rate reductions, bringing key yields close to zero — a level not seen since the 2008 Global Financial Crisis.
Diokno returned to work after going under self-quarantine since coming in contact with a person who eventually tested positive for COVID-19. The BSP said Diokno did not contract the disease, based on his test result announced Wednesday.
The BSP added that it remains armed with other tools like possibly changing the interest rate corridor settings, reduction of banks’ reserve requirement, and suspension of the term deposit facility to support “sustainable” growth, and maintain price and financial stability.
However, two analysts said lower interest rates would not be enough to lift growth prospects.
“Lower rates would do little to ignite loan demand given that more than half of the workforce is holed up in their homes given strict curfews and restrictions for movement,” said ING Bank senior economist Nicholas Mapa, saying that the government must spend more than its ₱27.1-billion spending plan for COVID-19 response as it was worth just 0.1 percent of the local output.
RCBC economist Michael Ricafort, meanwhile, said more rate cuts could be on the table with inflation on a downtrend, but added that bigger state spending is needed to “shore up confidence” in the local financial markets, as well as extend help to poor Filipinos at this time.