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BSP to keep rates low ‘for next few quarters’

BENCHMARK interest rates will remain low “for the next few quarters” to support the virus-stricken economy, but unlikely to cross negative territory, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said on Tuesday.

“Given the old facts that we have, we intend to keep interest rates low until maybe the next few quarters,” Mr. Diokno told the ABS-CBN News Channel.

Last year, cumulative rate cuts from the central bank amounted to 200 basis points (bps), bringing the overnight reverse repurchase, lending and deposit rates to record-lows of 2%, 2.5% and 1.5%, respectively.

Asked whether the BSP could go lower than current rates, Mr. Diokno said: “I don’t want to make a commitment but it will depend on the inflation level, and whether there is still a need for further monetary easing.”

Headline inflation accelerated to 3.5% in December, driven by the faster pace of food and transport price increases.

However, Mr. Diokno is not keen on pushing rates below zero. “We still have room for conventional monetary policies,” he added.

At its Dec. 17 meeting, the Monetary Board left rates untouched, citing the benign inflation environment as well as the rollout of some coronavirus vaccines that lifted prospects for global economic recovery.

Despite the record low interest rates, lending growth remained sluggish at 1.9% in October, the slowest since the same pace was logged in September 2006.

At the same time, Mr. Diokno said further reductions in the reserve requirement ratio (RRR) of banks are still on the table.

“We still have some play on the reserve requirement. I made a commitment to cut the reserve requirement to a single digit by the end of my term in 2023 so we still have some play there,” the BSP chief said.

The Monetary Board is authorized to cut the reserve ratio by up to 400 bps in 2020. However, the BSP only slashed it by 300 bps, through a 200-bp cut for big banks and 100 bps more for thrift and rural lenders.

Reserve requirements for universal and commercial banks stand at 12%, while those for thrift and rural banks are at 3% and 2%, respectively.

“Instead of policy rate cuts, maybe the BSP will go for a reserve requirement cut in the meantime, as it is in line with Mr. Diokno’s goal to lower banks’ ratio to a single digit,” UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in a text message.

The upcoming fourth-quarter gross domestic product data will be a crucial factor for the BSP to gauge whether to go for a reserve ratio cut, said ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa.

“We believe [Mr.] Diokno will be willing to utilize this space if and when GDP numbers continue to disappoint although an infusion of liquidity may not do much in terms of stimulating the moribund economy,” he said in an e-mail.

The Philippine Statistics Authority will release fourth-quarter and full-year 2020 GDP figures on Jan. 28. The BSP’s first policy-setting meeting is scheduled for Feb. 11, although previous reserve requirement cuts were done off-cycle.

The country’s economic output shrank by 11.5% in the third quarter, bringing the contraction for the first nine months to 10%. The government expects the economy to shrink by 8.5-9.5% for 2020.

“[Mr.] Diokno will continue to call fiscal authorities to act but he will also likely look to do whatever it takes to get the economy back on track,” Mr. Mapa said. — Luz Wendy T. Noble

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