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Philippines Monetary Policy October 2020

Philippines: Central Bank keeps rates unchanged in October

At its 1 October monetary policy meeting, the Central Bank of the Philippines (BSP) decided to leave the overnight reverse repurchase facility rate at a record low of 2.25%. Accordingly, the overnight deposit facility and the overnight lending facility rates—which establish the floor and the ceiling of the interest rate corridor—were kept stable at 1.75% and 2.75%, respectively.

The decision to stay put was driven by a recovery in the global economy, and “encouraging signs of recovery in domestic economic activity”. Moreover, inflation remained within the 2.0%–4.0% target range in August, despite undershooting the BSP’s expectations. As such, further loosening was not warranted, and keeping rates unchanged allows the Bank to better analyze the impact of past easing.

The Bank did not give explicit guidance on the direction of monetary policy going forward, but stated that it “stands ready to deploy its full arsenal of instruments as needed”. Our panelists are split: while several see rates unchanged ahead, others see additional loosening to spur activity. Much will depend on the evolution of the Covid-19 outbreak—a rise in infection rates could lead to further lockdown measures and necessitate rate cuts.

Analysts at UOB do not see further easing in the short term, stating:

“The overall tone of the latest monetary policy statement is deemed slightly more upbeat than August’s statement. This infers higher odds for a prolonged rate pause by BSP going into 2021. […] As such, we keep our view that BSP will leave both the RRP rate and RRR for commercial banks unchanged at 2.25% and 12.00% respectively through 2021.”

However, analysts at Nomura take an opposing view:

“We think BSP’s pause at its last two meetings is unlikely to last long and hence we still forecast a total of 75bp in rate cuts this year, taking the policy rate to a record-low 1.5%. The growth-inflation picture continues to justify our policy rate forecast: we expect 2020 GDP growth of -6.6%, […] partly because of the fiscal cliff in which government spending growth will slow sharply for the rest of the year.”

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