BSP surprises, slashes key rates to record-low
MANILA, Philippines (UPDATE 2 6:28 p.m., April 16) — The Bangko Sentral ng Pilipinas (BSP) delivered on Thursday fresh monetary stimulus outside schedule, pushing down key rates to new record-lows.
In a Viber message to reporters, BSP Governor Benjamin Diokno said the central bank slashed its overnight reverse repurchase rate by 50 basis points to 2.75% effective Friday. The rates on overnight lending and deposit facilities were also reduced accordingly.
The latest cut was decided by the seven-member Monetary Board outside the original schedule when they are due to revisit policy every six weeks. The next policy meeting was only supposed to be held on May 21. Diokno said the upcoming meeting has been cancelled.
The so-called off-cycle decision from BSP was a departure from Diokno's initial pledge to stick to schedule on reviewing policy while the global coronavirus disease-2019 (COVID-19) pandemic lingers. It highlights the challenge faced by policymakers to protect their economies from the virus' impact.
By cutting rates, BSP essentially is signaling to banks to lower the interest on their loans in a bid to entice consumers to borrow. Borrowings, in turn, are expected to be used on productive activities that boost economic activity.
Last March 9, the central bank also slashed rates by 50 bps with Diokno promising thereafter to do more if needed. Since getting appointed March last year, the dovish governor had so far delivered on his pledges, including bringing down one of Asia's highest bank reserve ratios to 12% from 20% two years ago.
The BSP still has remaining ammunition. Apart from saying a "deeper" rate cut is needed last Sunday, Diokno said another 200 bps cut on bank reserves is "forthcoming," part of the authority he secured from the Monetary Board to trim them by as much as 400 bps.
The initial 200-bps cut, which freed up around P200 billion in cash for more lending, took effect at the end of March.
Tighter watch on capital flows
A day before the latest decision, Diokno told Philstar.com that the central bank would keep a closer watch on capital flows by reviewing projections on balance of payments "more often" or "quarterly" from the typical semestral schedule.
BOP summarizes economic activities that lead to capital inflows and outflows in an economy such as trade, remittances and investment.
Analysts say a more frequent review of BOP should give BSP better information on capital flows, which it can use to set policy and influence the amount of cash in the financial system at a time liquidity is needed the most to fund programs against COVID-19.
"Doubling the frequency of reviews on BOP projections means the need to better account for potentially greater volatility of the country's US dollar flows amid the once-in-a-lifetime COVID-19 pandemic," said Michael Ricafort, economist at Rizal Commercial Banking Corp., in a text message.
Editor's note: This report was updated to include Governor Benjamin Diokno's statement that the May 21 meeting has been cancelled.
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