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Philippines Monetary Policy June 2020

Philippines: Central Bank unexpectedly slashes policy rate in June

At its 25 June monetary policy meeting, the Central Bank of the Philippines (BSP) decided to cut the overnight reverse repurchase facility (RRP) by another 50 basis points to 2.25% from 2.75%. 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 1.75% and 2.75%, respectively. The move surprised market analysts who had expected either a smaller cut of 25 basis points or for rates to stay unchanged. The decision marked the BSP’s fourth consecutive cut and was designed to buffer the economy against fallout from the Covid-19 pandemic. As a result, the RRP now lies at a new record low since the Bank adopted the current interest rate corridor policy in 2016.

A benign inflation outlook and contracting economic activity drove the Bank’s decision to further ease rates in June. The Philippines’ economy is expected to be languishing in a deep recession in Q2 as lockdowns disrupted domestic activity in April and May, while a halted global economy is denting exports and remittances. In the accompanying statement, the BSP stated that even though economies have begun to reopen, “there remains a critical need for continuing measures to bolster economic activity and support financial conditions.”

Looking ahead, monetary policy is likely to remain accommodative as the economy continues to feel the effects of the pandemic. The BSP struck an accommodative tone, stressing that it “remains committed to deploying its full range of monetary instruments and regulatory relief measures as needed”. However, with rates at record lows after aggressive cuts totaling 175 basis points, market analysts are divided over whether the Bank will go lower or if the policy rate is at the floor.

Nicholas Mapa, senior economist at ING, noted:

“After the flurry of rate cuts and infusion of liquidity, today’s move may be the last from the central bank in 2020 with Governor Diokno likely to favour approximating positive real policy rates. Meanwhile, the Governor is also likely to hold back on reducing reserve requirements in the near term given that the financial system is flooded with liquidity with excess funds parked at the central bank’s deposit facilities hitting roughly PHP1.3 trillion in June.”

In contrast, Euben Paracuelles and Rangga Cipta, economists at Nomura, stated:

“We maintain our forecast that BSP will cut its policy rate by 25bp in Q3 to 2%, although we acknowledge a rising risk that it could still deliver more. We think the inflation outlook will become more supportive of further easing in the near term – our CPI inflation forecast for 2020 at 2.1% is lower than BSP’s latest projection, and importantly, we still pencil in CPI inflation falling below the 2-4% target in coming months.”

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