Diokno: BSP has room to reduce rates, RRR

The Bangko Sentral ng Pilipinas (BSP) has signaled that it is likely to resume its monetary policy easing, if warranted, to support the country’s economic recovery.

In a speech during the Nomura Virtual Investor Conference on Monday, BSP Governor Benjamin Diokno said the central bank’s move to implement policy rate reductions totaling 175 basis points (bps) and slash the reserve requirement ratio (RRR) for big banks by 200 bps and for small ones by 100 bps so far this year “have sent a strong signal that the BSP
is leading the Philippines toward a strong recovery over the near term.”

While the Bangko Sentral “has done quite a lot,” he stressed that its tool kit “is far from being exhausted.”

Diokno also said the central bank still had room to further trim its key interest rates and RRR.

“With the policy rate at 2.25 percent and inflation well within target, there is room for further adjustment in the key rate,” he added.

The BSP chief’s remarks came after the central bank’s policymaking Monetary Board (MB) last Thursday kept overnight borrowing, lending and deposit rates at 2.25 percent, 1.75 percent and 2.75 percent, respectively.

“Also, there is room to further reduce the reserve requirement,” Diokno said, adding that earlier this year, the MB allowed him to implement a 400-bps cut in the reserve requirement for 2020.

Big banks’ RRR, which is the proportion of current deposits that banks need to keep with the central bank against the sum they can loan out to borrowers, currently stands at 12 percent.

Diokno assured the public that the Bangko Sentral was prepared to do more if warranted.
“The BSP remains committed to a disciplined- and evidenced-based monetary policy making as it pursues its price stability objective,” he added.

The central bank chief’s latest policy guidance is consistent with analysts’ forecasts that the
country’s monetary authorities were not done yet with policy easing after taking a “prudent pause.”

“Given the dire outlook for growth and benign inflation environment, the case for more easing is clear,” Alex Holmes, Capital Economics’ Asia economist, has said, adding that his firm was seeing a 50-bps reduction in interest rates by October.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said “the economy needs all the support measures that it could get at this time, largely due to the adverse economic effects of the Covid-19 (coronavirus disease 2019) lockdowns/pandemic, amid the lack of additional funding for more fiscal stimulus measures, thereby making more monetary easing measures possible to help improve prospects of economic recovery, going forward.”

ANZ Research economists noted that further monetary accommodation by the BSP is still necessary.

“However, given the limited monetary transmission, future policy action could be in the form of a reduction in the RRR,” they said, adding that an additional 200-bps cut for the rest of the year was likely.