Borrowing rates

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

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

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

Banks and other credit companies use BSP rates as a benchmark for pricing loans, credit cards, and deposit rates. Since the start of the year, the central bank has lowered the key yield by 2% so far this year.

Demand deposit and loan rates were also lowered to 1.5% and 2.5%, respectively. BSP Governor Benjamin Diokno said authorities had taken note of “high uncertainty” as COVID-19 infections rose again in parts of the world, as well as the moderation of the global economic outlook.

“At the same time, the Monetary Board noted that if domestic production contracted at a slower pace in the third quarter of 2020, subdued corporate and household sentiment and the impact of recent natural calamities could be powerful obstacles to the recovery of the economy in the coming month, ”said the head of the central bank, also noting the downward trend in inflation at the local level.

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

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

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

The central bank’s move came a week after the government announced that the economy shrank another 11.5% in the third quarter, following the worst-ever contraction of 16.9% between April and June.

The government expects a gradual rebound in growth by next year, as stay-at-home policies have been relaxed. Current quarantine rules now allow more people to go out shopping, dining and traveling, hoping to get the economy back on its pre-pandemic growth path.

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

BSP Deputy Governor Francisco Dakila, Jr. has said he expects the central bank to remain accommodative “over the next several months,” suggesting rates will likely stay low for now. The short term goal is to strengthen market sentiment and provide liquidity for loans.

The problem, however, is that the banks are reluctant to lend. Bank lending rose only 2.8% in September, driven by double-digit increases a year ago and a sharp slowdown from previous months. Lenders have reduced risk tolerance as they too grapple with the poor business outlook and income outlook due to the global coronavirus crisis.

“Controlling the virus would be the most important factor leading to a resumption in demand for loans,” said Dakila, noting that any future plans to exit this ultra-low cost of borrowing regime will be “swift and gradual. “.

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He added that reviving consumer spending depends on containing the pandemic and developing an effective vaccine.

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

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

The BSP will hold its last rate-setting meeting of the year on December 17.