MANILA – Fitch Solutions forecasts the Bangko Sentral ng Pilipinas (BSP) to further utilize other policy tools more than the key rates this year to address the economic impact of the coronavirus disease 2019 (Covid-19).
In a report, the unit of Fitch Group forecasts an additional 50-basis-point key policy rate reduction from the BSP this year after a total of 75-basis-point cut as of March.
During the rate-setting meet of the policy-making Monetary Board (MB) last March 19, the Board allowed the temporary relaxation of BSP regulations on banks’ compliance reporting, calculation of penalties on required reserves, and the single borrowers limits.
It also approved the temporary cut in the term spread on rediscounting loans vis-à-vis the overnight lending rate to zero.
It likewise slashed its average inflation forecast for this year from 3 percent to 2.2 percent, and the next year’s figure from 2.9 percent to 2.4 percent.
The BSP attributed this decision to “lower-than-projected inflation outturns in recent months, a sharp decline in global crude oil prices, and the adverse effects of the 2019 novel coronavirus disease (COVID-19) on global and domestic economic activity.”
Rate of price increases last February slowed to 2.6 percent from month-ago’s 2.9 percent due to deceleration of the annual increase in the heavily-weighted food and non-alcoholic beverages index.
The government’s inflation target for this and next year is a range between 2-4 percent.
Fitch Solutions forecasts domestic inflation rate to average at 2.1 percent this year, and to accelerate to 3.2 percent next year.
It said reduction in the central bank’s average inflation projections until next year “gives the BSP ample room to cut rates further.”
It, however, believed that BSP Governor Benjamin Diokno will maintain his prudent stance and only cut rates another 25 bps, instead turning to other monetary policy tools to free up liquidity to the Philippine economy.
“The BSP will only shave its key policy rate another 50 bps to 2.75 percent in our view due to a need to attract foreign inflows and protect the peso amid an aggressive risk-off environment,’ it said.
On Tuesday, the BSP announced the 200-basis-point reduction in universal and commercial bank’s (U/KBs) reserve requirement ratio (RRR) effective March 30, 2020 “to calm the markets” and to encourage banks to continue lending to both retail and corporate sectors.
“This will ensure sufficient domestic liquidity in support of economic activity amidst this global pandemic due to the coronavirus disease (Covid-19),” it said.
It said a similar decision for the RRR of other BSP-supervised financial institutions (BSFIs) “will also be explored.” (PNA)