Philippine central bank slashes its key interest rates by 50 bps

The Philippine central bank (CB) unexpectedly cut its benchmark interest rate by another 50 basis points to a new low on Thursday, extending an aggressive policy easing cycle to cushion the economic blow from the coronavirus pandemic.

The cut was the fourth this year, and took the rate on the overnight reverse repurchase facility to 2.25%. The central bank has now slashed the rate by 175 bps since February.

Rates on the overnight deposit and lending facilities were likewise reduced to 1.75% and 2.75%, respectively.

The Philippine government is seeking a record 4.3 trillion peso ($85.89 billion) budget for 2021 focused on reviving a coronavirus-hit economy expected this year to shrink for the first time in two decades, a top official said.

Eight out of 12 economists in a Reuters survey had expected the central bank to keep the rate steady, while the other four had forecast a 25 bps cut.

“The Monetary Board decided that a further reduction in the policy rate amidst a benign inflation environment would help mitigate the downside risks to growth and boost market confidence,” Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said.

Activity has slowed due to a coronavirus-induced lockdown, while the outlook for global growth has deteriorated, he said.

The BSP forecast inflation to average 2.3% this year and 2.6% in 2021, higher than the April estimates of 2.0% and 2.45%, respectively, but well within the official target of 2%-4% for both years.

The BSP remains committed to deploying a full range of monetary instruments and regulatory relief measures as needed to support growth, Diokno said.

“The surprise cut is seen as a pre-emptive monetary easing measure needed most by the economy at this time and in the coming months,” said Michael Ricafort, economist at Rizal Commercial Banking Corp in Manila.

Further easing may be needed to prevent the economic contraction from deepening, Ricafort said.

The Philippine economy is expected to contract 3.8% this year, the Asian Development Bank (ADB) said last week.

“After the flurry of rate cuts and infusion of liquidity, today’s move may be the last from the BSP in 2020 with Diokno likely in favor of approximating positive real policy rates,” ING said in a note.

“Meanwhile, Governor Diokno will also likely hold back on reducing reserve requirements in the near term given that the financial system is swamped with liquidity with excess funds parked at BSP’s deposit facilities hitting roughly 1.3 trillion peso in June.”

The administration of President Rodrigo Duterte faces the enormous task of resuscitating growth and creating jobs in 2021, before his six-year term ends in June of the following year.

The budget proposal, set to be submitted to Congress when it resumes session next month, is 5% higher than this year’s 4.1 trillion pesos.

Budget Secretary Wendel Avisado said the proposal would help the government move past the pandemic and “provide the kind of programmes, activities and projects for our people, especially those who lost their jobs”.

The Southeast Asian country, which used to enjoy one of the world’s fastest economic growth rates before the coronavirus wreaked havoc on global business, is projected to suffer a 2% to 3.4% decline in gross domestic product this year, government officials have said.

Next year’s spending is geared toward further buttressing the healthcare system, ensuring food security, hastening the government’s digital transformation, and helping communities to rebound, according to a budget briefing document.

The proposed budget is separate from a 1.3 trillion peso stimulus bill that the lower house passed early this month, and another stimulus plan under discussion at the Senate.

The country’s economic managers, however, have raised concerns about the stimulus packages proposed by Congress and the absence of excess revenues to fund them.

The Philippine peso inched higher on Thursday, defying a broader selloff in Asian currencies, as investors bet the country would maintain a relative yield advantage by keeping interest rates unchanged at its central bank meeting. Stocks and currencies across the region were hit by global fears of surging coronavirus infections and fresh trade tensions, pulling money into the dollar and other traditional safe havens for capital.  Stock markets of trade-dependent economies such as South Korea, Singapore and Thailand were the worst hit, falling between 1.3% and 1.8%. South Korean shares and the won also faced pressure from a new government plan to widen capital gains taxes for retail investors.

Reuters