BSP takes 'prudent pause' on easing streak

MANILA, Philippines — Monetary authorities took a “prudent pause” on firing fresh stimulus to an ailing economy, hitting the breaks on any changes in policy for the first time this year on Thursday.

In a briefing, Benjamin Diokno, governor of Bangko Sentral ng Pilipinas (BSP), announced the policymaking Monetary Board kept overnight reverse repurchase rate at a record-low of 2.25%. Overnight lending and deposit rates were likewise maintained at 2.75% and 1.75%, respectively.

Thursday marked the first time this year that the central bank did not alter its policy stance, which in recent months had been characterized by lower benchmark rates to prod banks to do the same on the interest of their loans and encourage more borrowing.

“A prudent pause will enable the cumulative 175 basis point reduction in the policy rate s well as other monetary and regulatory relief measures by the BSP to fully work their way to the economy…,” Diokno said in a prepared statement.

After an initial decrease of 25 basis points last February, Diokno led the BSP to deliver a massive 150 bps cut on policy rates from March to June, at the time the entire archipelago was at the height of sweeping lockdowns meant to slow the spread of coronavirus disease-2019 (COVID-19).

The central bank halted its easing episodes for now after seeing higher inflation from this year until 2022, which are all still seen to fall within the government’s 2-4% target. BSP Deputy Governor Francisco Dakila Jr. said inflation would likely average 2.6% annually this year, up from June’s 2.3% forecast.

Consumer prices may further accelerate to 3% in 2021 and 3.1% in 2022, faster than June’s outlook of 2.6% and 3%, respectively.

“We note that the inflation in June and July was higher than our initial baseline projection although these inflation outturns were well within our forecast range,” Dakila said, explaining the upward changes in forecasts. Inflation hit 2.7% year-on-year in July, the fastest in five months.

“During the intervening time between the two monetary board meetings, fuel and oil has gone up and these are major factors that contributed to the revisions. These were partly offset by the sharper than expected contraction in growth, especially in the second quarter…,” he added.

Divided

In separate commentaries, analysts were divided on BSP’s future path following the latest decision. Alex Holmes, Asia economist at Capital Economics, said “with the pandemic weighing heavily on the economy, we doubt the Bank has finished easing.”

“Today’s decision likely marks a pause rather than an end to the easing cycle… Inflation is no barrier to further easing…As such, we continue to expect further cuts to the policy rate in the coming months,” he said. There are three policy meetings left in the fourth quarter. 

But Nicholas Antonio Mapa, senior economist at ING Bank in Manila, believes BSP is done taking up the cudgels for fiscal policy, which observers repeatedly said has fallen short in addressing the pandemic’s economic impact.

“With the economy in recession and the BSP likely running out of options to boost growth, fiscal authorities may need to frontload expenditures to avoid another quarter of double-digit contraction,” Mapa said.

Indeed, Diokno said economic activity remain “subdued and uncertain amid a resurgence in COVID-19 cases in many jurisdictions.” While BSP ease more to salvage the economy, BSP Director Dennis Lapid said the central bank can only do so much. 

“No amount of monetary easing and liquidity injection can push businesses and consumers to spend if the confidence is not there,” Lapid said.