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Philippines Monetary Policy March 2020

Philippines: BSP delivers another rate cut at March meeting

At its 19 March monetary policy meeting, the Central Bank of the Philippines (BSP) cut the overnight reverse repurchase facility (RRP) from 3.75% to 3.25%, which was larger than the 25-basis-point cut expected by market analysts. Accordingly, the overnight deposit facility (ODF) and the overnight lending facility (OLF) rates—which establish the floor and the ceiling of the interest rate corridor—were also reduced to 2.75% and 3.75%, respectively.

The coronavirus pandemic continues to wreak havoc on the global economy, prompting the Bank to cut rates for the second time this year. The Bank’s latest cut comes on the heels of President Duterte’s announcement on 16 March of strict home quarantine measures on the main island, which places half of the Philippines population under lock down, shuts down public transport, and shutters businesses. The quarantine measures are expected to weigh heavily on industrial activity, trade, OFW remittances and tourism. Alongside the rate cut, the Bank announced several other measures to support credit and liquidity in the financial markets, including the temporary relaxation of BSP regulations and a reduction in the term spread on rediscounting loans relative to the overnight lending rate to zero.

Downside risks to inflation gave the Bank additional room to ease. Downward pressures will likely stem from the dramatic drop in global crude oil prices so far this year and the risk of a prolonged pandemic softening demand-pull inflation. The BSP now sees inflation remaining below the midpoint of the Bank’s target range of 3.0% plus or minus 1.0 percentage point this year and next. The Monetary Board pencils in average inflation of 2.2% in 2020 and 2.4% in 2021 (February’s projections: 3.0% and 2.9%, respectively).

In its communiqué, the Bank stated it stands ready to act to relieve tight financial conditions and support the economy. The BSP noted it was assessing all instruments in its monetary policy tool kit and is considering “a range of other supplementary measures that may be required” such as possibly reducing the reserve requirement ratios, and recalibrating the interest rate corridor. Our panelists are taking recent developments into account and new forecasts will be available on 24 March.

Commenting on the limitations of the Bank’s cut in offsetting the virus’ impact, ING senior economist Nicholas Mapa commented:

“Lower rates would do little to ignite loan demand, given that more than half of the workforce is holed up in their homes facing strict curfews and restrictions on movement.  With the central bank moving aggressively, we now await additional action on the fiscal front with the government rolling out a Covid-19 fiscal stimulus package worth a mere $27bn, roughly 0.1% of GDP.”

The next monetary policy meeting is scheduled for 21 May 2020.

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