Monetary Board Cuts Policy Rate by 50 Basis Points

At its meeting on monetary policy today, the Monetary Board decided to cut the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 50 basis points (bps) to 3.25 percent, effective Friday, 20 March 2020. The interest rates on the overnight lending and deposit facilities were reduced to 3.75 percent and 2.75 percent, respectively.

In addition, the Monetary Board authorized the time-bound, temporary relaxation of BSP regulations on compliance reporting by banks, calculation of penalties on required reserves, and single borrower limits. The Monetary Board also approved a temporary reduction in the term spread on rediscounting loans relative to the overnight lending rate to zero. The BSP will issue the detailed guidelines on these monetary measures and regulatory forbearance items by the close of business today, 19 March 2020.

Latest baseline forecasts indicate a lower path of inflation for 2020 and 2021, with inflation expectations remaining firmly anchored within the target range of 3.0 percent ± 1 percentage point over the policy horizon. Average inflation is seen to settle at 2.2 percent in 2020 and 2.4 percent in 2021. The latest forecasts are (substantially) below the February monetary policy meeting projections of 3.0 percent for 2020 and 2.9 percent for 2021 due to lower-than-projected inflation outturns in recent months, a sharp decline in global crude oil prices, and the adverse effects of the 2019 novel coronavirus disease (COVID-19) on global and domestic economic activity.

Meanwhile, the balance of risks to the inflation outlook now leans toward the downside for both 2020 and 2021. The uncertainty over the potentially protracted pandemic poses significant downside risks to aggregate demand. 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. Moreover, COVID-19 has likewise dampened prospects for the global economy, which could negatively impact tourism and trade, Overseas Filipino remittances, and foreign investments.

Given these considerations, the Monetary Board decided that there is a need for a follow-on monetary policy response to address the adverse spillovers associated with the ongoing pandemic. 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 market confidence amid stronger headwinds. The monetary policy easing is also aimed at mitigating the risk of financial sector volatility in light of unfolding global developments by ensuring adequate domestic liquidity and credit in the financial system as well as lowering borrowing costs for affected firms and households.

The Monetary Board also recognizes that the health and safety of the Filipino people remains the government’s foremost priority. In this regard, the Monetary Board reiterates its support for urgent and carefully coordinated measures with other government agencies to alleviate the spillover effects of the pandemic on people and firms, with a view toward preventing any long-lasting economic and social damage.

Going forward, the BSP will remain data-driven as it considers a range of other supplementary measures that may be required to support non-inflationary and sustainable growth over the medium term. These supplemental actions may include, but are not limited to, recalibrating the interest rate corridor settings; reducing the reserve requirement ratios; suspending the term deposit facility (TDF) auctions; and ensuring access to liquidity-enhancing facilities such as the rediscounting windows. The BSP is prepared to use its full range of monetary instruments and to deploy regulatory relief measures as needed in fulfillment of its price and financial stability mandates.