To boost economy, Bangko Sentral cuts interest rates by 25 basis points

Ralf Rivas

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To boost economy, Bangko Sentral cuts interest rates by 25 basis points
Amid the global economic slowdown and the novel coronavirus spooking markets, the Philippines' central bank aims to shore up the economy by trimming interest rates

MANILA, Philippines – In a bid to boost the economy amid a global slowdown and the spread of the novel coronavirus, the Bangko Sentral ng Pilipinas (BSP) Monetary Board trimmed key policy rates by 25 basis points in its first policy meeting for 2020.

On Thursday, February 6, the Monetary Board reduced the overnight borrowing rate to 3.75%. The overnight lending and deposit facilities were likewise adjusted to 4.25% and 3.25%, respectively.

The BSP decided to cut interest rates as inflation remained within the target band of 2% to 4%.

But it noted upside risks to inflation, particularly the spread of African swine fever, tighter supply of rice in the international market, and the Taal Volcano eruption.

“Uncertainty over trade and economic policies in major economies continue to weigh down on global demand, thus mitigating upward pressures on commodity prices,” the BSP added.

With the global slowdown offsetting inflationary risks, the Monetary Board said there was enough room for a policy rate cut to support market confidence.

“While recent demand indicators still point to a firm outlook for the domestic economy, the Monetary Board believes that a policy rate cut would provide additional policy support to ward off the potential spillovers associated with increased external headwinds,” the BSP said.

BSP Governor Benjamin Diokno was previously quoted as saying that he is keen on reducing the reserve requirement ratio (RRR) or the amount banks need to hold in their reserves.

However, ING Bank Manila chief economist Nicholas Mapa noted that the previous RRR cuts have not translated directly into bank lending activity, and in effect, likely pushed back Diokno’s plans.

“Diokno noted that a mere 30% of liquidity released through [RRR] have been channeled to the productive sector with the bulk of the P400-billion infusion simply returning to the BSP via its overnight facilities. Thus we expect [RRR] reductions to be pushed back, likely to the second half of the year,” Mapa said.

Easing the interest rate generally lowers borrowing costs for consumers and would lead to people spending more. (READ: FAST FACTS: What does the Bangko Sentral ng Pilipinas do?)

More spending means higher demand for goods, which in turn boosts the economy over time. However, lowering interest rates may raise inflation, which is why the BSP times these moves accordingly. – 

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Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.