BPI lead economist Jun Neri
MANILA – Additional cuts in the Bangko Sentral ng Pilipinas’ (BSP) key rates are not expected in the near term despite the low inflation environment since real interest rates are now in negative territory.
To date, the central bank’s overnight lending rate is at 2.75 percent, the overnight reverse repurchase (RRP) rate at 2.25 percent, and the overnight deposit rate at 1.75 percent.
Average inflation in the first eight months of the year stood at 2.5 percent, at the lower half of the government’s 2-4 percent target band for 2020-2022.
Bank of the Philippine Island (BPI) lead economist Jun Neri forecasts inflation to average at 2.8 percent this year, higher than monetary authorities’ 2.5-percent forecast.
The generally low inflation environment provided monetary officials leeway to cut the BSP’s key policy rates to help boost the domestic economy from the impact of the pandemic.
Since the start of the year, the BSP’s key rates have been reduced by a total of 175 basis points.
During the rate-setting meeting of the BSP’s policy-making Monetary Board (MB) last August, the Board kept the rates unchanged to give the previous rate cuts time to work its way into the economy since the inflation outlook remains manageable.
“With real interest rates still at negative territory, we reiterate our view that it might be more difficult to bring down the policy rates further in the coming months. Moreover, there is reason to believe that additional rate cuts will only bring marginal benefits for the economy,” Neri said.
To further buoy the domestic economy from the pandemic, the BSP has also lent the national government some PHP300 billion under a repurchase agreement, with a maximum repayment period of six months; has reduced big banks’ reserve requirement ratio (RRR) by 200 basis points; cut rural and commercial banks’ (RCBs) RRR by 100 basis points; and allowed, for a certain period, RCBs’ lending to the micro, small and medium enterprises (MSMEs) as RRR compliance.
Neri expects bank lending to be limited by risk aversion among banks and the private sector.
He said “real demand for loans on the part of the corporates and consumers has also weakened given the lack of expansion activities.”
“What the economy needs more right now is a strong fiscal response that could offset the losses of the private sector,” he added. (PNA)
