Philippine CB Slashes Rate Unexpectedly

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The Philippine central bank lowered its interest rate unexpectedly by 50 basis points to spur growth as measures to combat the coronavirus, or Covid-19, weighed on economic activity.

The Monetary Board of the Bangko Sentral ng Pilipinas, or BSP, on Thursday, slashed the overnight reverse repurchase facility rate by 50 basis points to a record 2.25 percent. The bank was expected to hold its rate unchanged.

The bank had reduced its rate by 50 basis points each in April and March and by 25 basis points in February.

The rates on overnight deposit and lending facilities were lowered to 1.75 percent and 2.75 percent, respectively.

The board noted that a further reduction in the policy rate is required amidst a benign inflation environment as it would help mitigate the downside risks to growth and boost market confidence, Governor Benjamin Diokno said in a statement.

The board viewed that keeping an accommodative stance will further ease the cost of borrowing and ensure ample credit and liquidity in the financial system as the economy transitions toward recovery in the coming months.

The central bank said the balance of risks to the inflation outlook leans toward the downside from 2020 up to 2022 owing largely to the potential impact of a deeper and more disruptive pandemic on domestic and global demand conditions.

Inflation is seen at 2.3 percent this year and 2.6 percent in 2021.

After the flurry of rate cuts and infusion of liquidity, today’s move may be the last from the central bank in 2020 with Governor Diokno likely to favour approximating positive real policy rates, ING economist Nicholas Mapa, said.

Meanwhile, the governor is also likely to hold back on reducing reserve requirements in the near term given that the financial system is flooded with liquidity with excess funds parked at the central bank’s deposit facilities hitting roughly PHP 1.3 trillion in June, Mapa added.


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