The ocean and the beach in the Philippines

Philippines Monetary Policy November 2020

Philippines: Central Bank cuts rates to record low amid dim economic panorama

At its 18 November monetary policy meeting, the Central Bank of the Philippines (BSP) decided to cut the overnight reverse repurchase facility rate by 25 basis points to a record low of 2.00%. Accordingly, the overnight deposit facility and the overnight lending facility rates—which establish the floor and the ceiling of the interest rate corridor—were reduced to 1.50% and 2.50%, respectively.

The Bank’s decision to loosen its stance was aimed at breathing life into a shaky economy. GDP plummeted in the third quarter and prospects for Q4 appear bleak amid disruptions caused by social distancing restrictions, extreme weather and lockdowns abroad. Moreover, although inflation is within BSP’s 2.0%–4.0% target range, the Bank judged risks to the inflation outlook to be skewed to the downside as the worsening pandemic could further dampen demand. The strong peso, which has appreciated markedly against the dollar so far this year on a stronger external position, provided leeway for the Bank to cut.

The next policy meeting is scheduled for 17 December.

In its communiqué, the Bank reiterated that it “stands ready to deploy its full arsenal of instruments as needed”. As such, further easing is possible going forward if economic headwinds remain, with much depending on the evolution of the Covid-19 outbreak at home and abroad.

Analysts at Goldman Sachs state:

“We expect BSP to keep policy on hold from here after cutting rates a cumulative 200bp this year. Front-end rates have declined even more (250bp) on benign banking system liquidity conditions.”

However, analysts at Nomura are notably more dovish:

“We reiterate our forecast that BSP will cut its policy rate by another 50bp to 1.5%, likely delivering 25bp at its next monetary board meeting in December and then another 25bp in Q1 2021. The growth-inflation picture continues to justify our policy rate forecasts.”

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