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The current inflation environment will mean only marginal benefits from further rate cuts, said an economist at the Bank of the Philippine Islands (BIS).
“With real interest rates still in negative territory, we reiterate our view that it could be more difficult to cut policy rates further in the coming months,” BPI Chief Economist Emilio S. Neri, Jr. said in a statement. note issued Tuesday.
Headline inflation was 2.4% in August, while the overnight reverse repurchase rate stood at a record low of 2.25%.
Oil prices are unlikely to drive inflation beyond the central bank’s 2-4% target this year despite the beginnings of a recovery in consumer demand, Neri added.
The Bangko Sentral ng Pilipinas (BSP), to support the economy during the pandemic, cut rates on overnight loans and deposits to record lows of 2.75% and 1.75%, respectively.
For now, a solid fiscal response to support the private sector will be more important than cutting rates further, Neri said.
“Risk aversion on the part of both banks and the private sector is likely to limit loan expansion. The real demand for loans by businesses and consumers has also weakened in the absence of expansion activities, ”he said.
Bank loan growth was 6.7% year-on-year in July, the slowest pace since the 5% expansion in March 2010, central bank data showed.
Meanwhile, Neri said that the monetary support that the BSP has already unleashed will keep bond yields low in the short term.
“However, risks related to inflation and the exchange rate remain high and may put a floor to further cuts in the policy rate in the short term,” he said.
The central bank held key rates stable in August, “a prudent pause” after aggressive cuts in previous meetings. BSP Governor Benjamin E. Diokno has said rates are likely to remain in place in the coming quarters because the monetary measures were designed to anticipate the crisis. He added that there is room for further action if the need arises.
The next policy meeting of the Monetary Board is scheduled for October 1. Luz Wendy T. Noble
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