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With the expectation that the previous rate cuts, totaling 200 basis points (bp), would help accelerate the recovery of the economy, the Monetary Policy Board decided yesterday to maintain the key rates of the Bangko Sentral ng Pilipinas ( BSP).
The interest rate on the BSP overnight reverse repurchase facility remains at 2.0 percent after the 25 basis point cut from the previous meeting.
Interest rates on demand deposits and credit facilities also remained at 1.5 percent and 2.5 percent, respectively.
Benjamin Diokno, governor of the BSP and head of the Monetary Board, said that “the configuration of monetary policy remains appropriate.”
“The Monetary Board believes that an accommodative monetary policy stance, coupled with sustained fiscal initiatives to ensure public welfare, should accelerate the economy’s transition to a sustainable recovery,” Diokno said.
Central banks lower interest rates to encourage borrowing and investment, potentially spurring economic growth. Although this movement may accelerate inflation, the Monetary Board has room to move, since the prices of the main raw materials are expected to remain at comfortable levels.
Meanwhile, rates go up when there is too much growth, which is not the case now. Global economic activity, including that of the Philippines, is expected to slow this year as almost all countries are affected by the virus.
Diokno said that the inflationary environment remains benign.
“The latest baseline forecasts have increased slightly due to the sharp rise in world crude oil prices and higher than expected food inflation in November. However, since the increase in food prices is transitory, the future trajectory of inflation is expected to remain firmly within the government’s target of 2-4 percent over the policy horizon, ”Diokno said.
He added that the balance of risks to the inflation outlook “is tilting downward from 2020 to 2022 due in large part to possible disruptions in national and global economic activity amid the ongoing pandemic.”
Diokno said the Board noted that the resurgence of coronavirus disease 2019 (COVID-19) cases globally “has moderated economic activity with the reimposition of preventive measures in recent weeks.”
“Optimism about vaccine delivery has raised market sentiment, supporting better prospects for global growth. On the domestic front, the Monetary Board also noted early signs of improved mobility and confidence. While recent natural calamities could spell strong headwinds for growth, further relaxation of quarantine measures should help facilitate the economy’s recovery in the coming months, ”Diokno said.
Economists widely expected the move.
Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said that with average inflation from January to November is 2.6 percent, the decision results in “negative interest rate returns and causes any further cuts in the local policy rate is somewhat challenging for now. “
Ricafort said total cuts so far in 2020 are at -2 percentage points (or -200 bps) from 4 percent at the end of 2019, considered among the most aggressive in the world.
“However, inflation is expected to decline from December 2020 to February 2021 to just over 2 percent or even slightly below 2 percent, largely due to the higher base / denominator effects earlier. of COVID-19, so it could still support any further monetary easing measures, moving forward. “Ricafort said.
“Inflation could fundamentally recover in 2021, especially if the economic recovery accelerates further, especially with any additional measures to reopen the economy further, especially if the COVID-19 vaccine is launched in 2021 that could help reduce new cases. local COVID-19, increase infrastructure spending and reduce base / denominator effects starting in March 2021 or exactly one year after the COVID-19 lockdowns / pandemic began, which would mathematically lead to a rate of inflation highest annual thereafter, assuming all other factors remain the same. “
Alex Holmes, an Asia economist at London-based Capital Economics, sees, however, “more ease in 2021.”
“Given the weak recovery, further relaxation is likely next year. The pause was not a surprise, ”Holmes said.
According to Holmes, the BSP “seemed hopeful that the recovery would accelerate, noting that the accommodative monetary stance and fiscal initiatives should accelerate the economy’s transition to a sustainable recovery.”
“But we suspect that the recovery in the coming quarters will disappoint. GDP experienced a mediocre rebound in the third quarter, with the pace of contraction only slowing from -16.9 percent year-on-year in the second quarter to -11.5 percent. And we have targeted another weak pickup in growth this quarter, to -8.5 percent, “said Holmes.
With the virus still out of control, Holmes said restrictions will need to stay in place longer, further delaying recovery.
“It seems unlikely that promising news about vaccines will quickly change the situation. While the Philippines is close to getting 25 million doses of the Sinovac vaccine, that alone would be enough to inoculate just over 10 percent of the population. What’s more, the economic scars of the recession, including business insolvencies, weaker household balance sheets and higher unemployment, will weigh heavily on demand for many months to come. Overall, we expect the economy to contract 9.5 percent this year and grow 11 percent in 2021, which would still leave output around 10 percent below its pre-crisis trend by the end of the year. next year, ”Holmes said.
