MANILA – Economists said the unexpected 50 basis points reduction in Bangko Sentral ng Pilipinas’ (BSP) key rates Thursday indicates the gravity of the situation, although it could help the economy from the projected contraction this year due to the pandemic.
BSP’s policy-making Monetary Board (MB) slashed the central bank’s overnight reverse repurchase (RRP) rate to record-low 2.25 percent, the overnight deposit rate to 1.75 percent, and the overnight lending rate to 2.75 percent effective June 26, 2020.
“The surprise BSP rate cut of -0.50 may be seen as a pre-emptive monetary easing measure needed most by the economy at this time and in the coming months,” Rizal Commercial Banking Corporation (RCBC) chief economist Michael Ricafort said in an e-mail to the Philippine News Agency.
He said “more monetary easing measures may be needed as seen by the latest BSP rate cut” due to the national government’s financial constraints for stimulus measures. The latest rate cut, which to date brought the total for the year to 175 basis points, is needed “to prevent the economic contraction from spiraling further and also to help mitigate/limit the risks of recession looming locally and in many countries worldwide largely brought about by the Covid-19 lockdowns/pandemic,” he added.
In the first quarter of the year, the domestic economy posted a 0.2-percent contraction, the first since the last quarter of 1998.
Ricafort said the latest BSP key rate reduction “could also signal the possibility of a surprise cut in (the) bank's reserve requirement ratio (RRR) in the coming days/months.”
The MB has authorized Diokno to slash banks’ RRR by a total of 400 basis points this year, and half of this has been used last March.
The possible RRR cut is “another potential pre-emptive move as needed most by the economy at this time and in the coming months,” he added.
A 100 basis points cut in banks’ RRR is seen to release about PHP90 billion worth of liquidity into the domestic economy.
In a report, ING Bank senior economist Nicholas Mapa said BSP’s latest rate cut is another factor that will help the domestic economy from the projected contraction this year.
He, however, forecasts this key rate reduction to be the last for this year “with (BSP Governor Benjamin) Diokno likely in favor of approximating positive real policy rates.”
Domestic inflation rate decelerated further to 2.1 percent last May, bringing the average in the first five months this year to 2.5 percent.
Cutting the BSP’s key policy rates by at least 25 basis points more will result in a negative real interest rates in the country.
For one, a negative interest rate will mean that instead of bank account holders earning from their funds deposited with the banks, they will be required to pay the banks to keep their cash.
Mapa does not see any cut in the RRR “in the near term given that the financial system is swamped with liquidity with excess funds parked at BSP’s deposit facilities hitting roughly PHP1.3 trillion in June.”
“The surprise rate cut by the BSP will likely sap some appreciation pressure for the peso in the near term, which has enjoyed relative strength in recent weeks buoyed by financial account inflows tied to the government’s foreign borrowings,” he said.
Mapa added the local bond market may benefit from the central bank easing, offsetting some concerns about additional bond supply in the near term after the government posted another substantial budget deficit for the month of May. (PNA)