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Philippines Surprises With Half-Point Rate Cut Amid Crisis

Philippines Surprises With Half-Point Rate Cut to Boost Economy

The Philippine central bank cut its benchmark interest rate by a bigger-than-expected 50 basis points to support an economy facing its worst crisis in decades.

Bangko Sentral ng Pilipinas lowered its key rate to 2.25% from 2.75% on Thursday. Only one of the 22 economists in a Bloomberg survey predicted the move, with 12 forecasting no change and the rest expecting a 25 basis-point easing.

“The Monetary Board decided that a further reduction in the policy rate amidst a benign inflation environment would help mitigate the downside risks to growth and boost market confidence,” Governor Benjamin Diokno said in a statement.

Philippines Surprises With Half-Point Rate Cut Amid Crisis

The Philippines is bracing for its deepest economic slump in more than three decades, with a contraction of 2% to 3.4% on the cards for this year. With limited fiscal support, the central bank is taking on the bulk of the stimulus burden in the Southeast Asian nation. It’s cut interest rates now by 175 basis points this year -- lowering by 50 basis-point increments in each of three latest decisions -- slashed reserve ratios for banks and pumped liquidity into the financial system.

“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,” Diokno said.

Philippines Surprises With Half-Point Rate Cut Amid Crisis

The governor had earlier this month signaled his preference for keeping real interest rates above zero, fueling perceptions that there’s limited scope for more easing. With consumer prices rising 2.1% in May from a year earlier, the inflation-adjusted interest rate in the Philippines is now 0.15%.

“With the economic outlook dimming, BSP opted to provide fresh stimulus to insulate the economy,” said Nicholas Mapa, a senior economist at ING Groep NV in Manila. “This is likely Diokno’s last move for the year, as he looks to preserve positive real policy rates.”

Reserve Requirement

The central bank may have “room to accelerate” reductions to lenders’ reserve requirement ratio, but that depends on the outlook for liquidity and inflation, Deputy Governor Francis Dakila said in a virtual briefing Thursday.

The peso closed little changed at 50 per dollar. The currency is among the top performers in emerging markets this year, rising more than 1% against the greenback.

The rate cut will have “limited impact” on the peso, which will continue to be firm, said Mitul Kotecha, a senior emerging markets strategist at TD Securities in Singapore. “BSP did not ease reserve requirements, but we think another RRR cut will be forthcoming soon.”

The central bank provided updated forecasts on inflation:

  • CPI will average 2.3% in 2020, up from May’s projection of 2.2%
  • Inflation will accelerate to 2.6% in 2021, up from a previous projection of 2.5%

Elsewhere in the region, central banks have been driving interest rates down, but at a slightly more gradual pace. Indonesia cut rates last week for the first time in three months, while the Bank of Thailand on Wednesday left its rate unchanged at a record low.

©2020 Bloomberg L.P.