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Philippines Monetary Policy April 2020

Philippines: BSP slashes rates to lowest level since introduction of corridor system in 2016 in April

At an off-cycle monetary policy meeting on 16 April, the Central Bank of the Philippines (BSP) cut the overnight reverse repurchase facility (RRP) another 50 basis points to 2.75% from 3.25%. 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 lowered to 2.25% and 3.25%, respectively. The Bank’s latest move to buffer the economy brought the RRP to the lowest level since the Bank adopted the current interest rate corridor policy in 2016.

The Central Bank’s third consecutive rate cut is targeted at mitigating the shock to the economy inflicted by the Covid-19 pandemic by ensuring adequate liquidity in the financial system and reducing borrowing costs. Moreover, the battle worldwide to fight the virus has put a deep dent in global growth prospects for this year, and BSP assesses that the economic situation will take time to stabilize. Commenting on the Bank’s emergency meeting BSP Governor Diokno stated: “Knowing that monetary policy works with a lag, it is better for the Monetary Board to act now rather than later.”

In addition to the Bank’s latest cut, the Monetary Board also unveiled a package of additional measures to reduce the financial burden on micro-, small- and medium-sized enterprises (MSMEs). Among the measures, any loans granted to MSMEs will be counted as part of banks’ compliance with reserve requirements.

In its communiqué, the Bank stated it stands ready to act when necessary to relieve tight financial conditions and support the economy, stating “the BSP stands prepared to use its full range of monetary instruments and to deploy regulatory relief measures as needed”.

Commenting on the most recent rate cut, analysts at Nomura stated:

“Despite BSP delivering a total of 200bp in this easing cycle—one of the most aggressive in the region—we believe BSP remains on a firm easing bias due to the elevated uncertainty of the COVID-19 outbreak and its already worsening impact on the economy. […] We think BSP’s? next likely move is a 200bp cut in the reserve requirement ratio (RRR) in the near term to 10%, in line with BSP’s efforts to provide sufficient liquidity and help those sectors that are hardest hit by the outbreak and the suspension of economic activity due to the extended lockdown period.”

The extraordinary meeting in April will substitute for the 21 May meeting and the next monetary policy meeting is scheduled for 25 June 2020.

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