Philippine central bank keeps interest rate on hold

The Philippine central bank, BSP, kept its overnight reverse repurchase rate (RRP) on hold at 2.25 percent today, as was expected. Governor Diokno noted that the policy decision to stay put was based on the currently supportive financial conditions. In previous public statements, the Governor has also highlighted the need for previous policy rate cuts to filter through the system. Until now, the reduction in lending rates has not been commensurate with the 175bp year-to-date reduction in the policy rate.

The BSP upwardly revised its inflation projection to 2.6 percent in 2020 and 3 percent in 2021. Higher projections for this year are based on the rebound in oil prices and recent inflation outturns. Even so, the bank characterised the inflation scenario as benign. It is unlikely to impede monetary policy settings, said ANZ in a research report.

BSP, on the growth front, believes that a gradual rebound in underway. The recovery is still quite tentative and will need to be nurtured. Real time activity indicators flat-lined in July and dropped in August as the government had to re-impose mobility restrictions. These measures have now been partly relaxed but even so, the rate of the rebound is not expected to be swift.

“Overall, we are of the view that further monetary accommodation is still necessary. However, given the limited monetary transmission, future policy action could be in the form of a reduction in the RRR. A further cut of 200bps in the rest of the year is likely, in our view. Lastly, and ahead of the policy announcement, the BSP did relax macro prudential standards by increasing the real estate loan limit of universal and commercial banks from 20 percent to 25 percent. This relaxation is intended to increase the flow of credit to the property sector”, added ANZ.