Borrowing rates

BSP cuts borrowing rates to a new all-time low of 2%

Metro Manila (CNN Philippines, November 19) — The Bangko Sentral ng Pilipinas on Thursday triggered another interest rate cut to an all-time low of 2%, hoping lower borrowing costs will support an economic rebound.

The Currency Board cut the policy rate by 25 basis points, now the lowest on record, as the Philippine economy remains in recession due to earlier lockdowns amid the COVID-19 pandemic. The last rate cut dates back to June.

Banks and other lending companies rely on BSP rates as a benchmark for pricing loans, credit cards, and deposit rates. The central bank has lowered the policy rate by 2% cumulatively so far this year.

Deposit and overnight lending rates were also cut to 1.5% and 2.5%, respectively. BSP Governor Benjamin Diokno said authorities took note of the “high uncertainty” as COVID-19 infections rose again in some parts of the world, as well as the moderation in the global economic outlook.

“At the same time, the Monetary Board noted that while domestic output contracted at a slower pace in the third quarter of 2020, sluggish business and household confidence and the impact of recent natural calamities could constitute strong headwinds to the recovery of the economy in the coming month,” the central bank chief said, also noting the benign trend in local inflation.

This decision was not expected by the markets, with most players expecting the BSP to remain on hold.

RELATED: PH among last in Asia-Pacific to recover from pandemic-induced crisis – Moody’s Analytics

The drop in yields will take effect on Friday, November 20. The key rate is now below the average inflation rate of 2.5% for the first 10 months of the year.

BSP said there “remains a critical need for continued policy support measures” to revive the national economy and revitalize market confidence.

The central bank’s decision came a week after the government announced the economy shrank another 11.5% in the third quarter, after the worst contraction of 16.9% on record from April to June.

The government expects a gradual rebound in growth by next year as containment policies have been eased. Current quarantine rules now allow more people to go out for shopping, dining and travel, in hopes of getting the economy back on its pre-pandemic growth path.

The BSP, meanwhile, sees inflation stabilizing within its target range of 2-4% over the next two years, with forecasts at 2.4% for 2020, 2.7% for 2021, 2.9 % for 2022.

BSP Deputy Governor Francisco Dakila, Jr. said he expects the central bank to remain accommodative “in the coming months,” hinting that rates are likely to remain low for the time being. The short-term objective is to revive market sentiment and provide liquidity for lending.

The problem, however, is that banks are reluctant to lend. Bank lending rose just 2.8% in September, following double-digit increases a year ago and a marked slowdown from previous months. Lenders have reduced their risk tolerance as they too grapple with weak business prospects and revenue prospects due to the global coronavirus crisis.

“Controlling the virus would be the single most important factor leading to a recovery in loan demand,” Dakila said, noting that any future plans to exit from this ultra-low borrowing cost regime will be “timely and gradual. “.

READ: Regulators want banks to lend more, price risks better to keep economy afloat after COVID

He added that reviving consumer spending depended on bringing the pandemic under control and developing an effective vaccine.

“Despite the new wave of easing, we are not confident that bank lending will pick up anytime soon given the declining growth outlook with high unemployment and still negative consumer sentiment,” said Nicholas Antonio Mapa, senior economist. of ING Bank, in a market commentary.

For Capital Economics, this may not be BSP’s last easing move. “Given the likely weakness in the economic recovery, we believe the BSP will cut rates further next year,” said its Asia economist, Alex Holmes.

The BSP will hold its last tariff meeting of the year on December 17th.