Philippines Holds Key Rate as it Boosts Debt Financing

(Bloomberg) -- The Philippine central bank kept its key interest rate unchanged for a second straight meeting and approved an $11 billion cash advance to the government to support pandemic relief measures.

The central bank left its benchmark rate at 2.25% on Thursday, as predicted by 19 of 20 analysts in a Bloomberg survey. One had expected a quarter-point reduction.

“A continued pause will allow prior measures by the Bangko Sentral ng Pilipinas to further work their way through the economy,” Governor Benjamin Diokno said in a statement. Later, he announced the bank had approved a 540-billion peso ($11.2 billion) cash advance to the government to fund virus relief efforts, the second such loan this year.

The Bangko Sentral is doing much of the heavy lifting to boost an economy forecast to shrink by as much as 6.6% this year. It cut its key rate by a total of 175 basis points earlier this year and deployed credit relief and other liquidity measures as the government limits fiscal stimulus.

“The planned second tranche of cash advances will have marginal impact on inflation and the currency, but successive rounds of such agreements may eventually call into question central bank independence,” said Nicholas Mapa, senior economist at ING Groep NV in Manila.

The Philippines’ benchmark stock index closed up 1.4%, the most in three weeks, before the decision. The peso, which has been Asia’s best performing currency this year, strengthened 0.1% to 48.43 to the dollar.

Burden Sharing

“With higher deficit financing needs, can you imagine if the Bureau of the Treasury has to go to the market and borrow? That would raise interest rates,” Diokno said about the cash advance. Higher interest rates would narrow the fiscal space for more productive spending and raise borrowing costs for consumers and companies, he said in a mobile-phone message.

Deputy Governor Francis Dakila said provisions in the central bank’s charter limiting the amount of support that can be provided safeguard the bank’s independence. Earlier in the pandemic the bank loaned the government 300 billion pesos via a repurchase agreement, which was recently repaid.

“In normal times, debt monetization would be more worrisome because of its potential inflationary effects,” as well as the perception of central bank independence, Dakila said. “However, like in other countries, the ongoing pandemic has required what we can call a ‘whole-of-government’ effort” to counter the pandemic’s impact.

Policy makers say the economy bottomed out in the second quarter, when it suffered its largest fall ever, but signs of pressure such as high unemployment, struggling manufacturers and a bereft tourism sector suggest aggressive easing steps have yet to filter through to the real economy. Consumer sentiment fell to its weakest on record in the third quarter.

Dakila said the benign inflation environment could allow Bangko Sentral to further lower banks’ reserve requirement ratios if needed. The central bank lowered its inflation forecasts Thursday:

• 2020 inflation is now seen at 2.3%, from 2.6% previously
• 2021 forecast was reduced to 2.8%, from 3%
• 2022 forecast was lowered to 3%, from 3.1%

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