Economists continue to project further cuts in the Bangko Sentral’s key policy rates next year even as real interest rates are now in the negative, citing the need for more economic activity boost.
This, after the unexpected 25 basis points reduction in the BSP’s key rates on Thursday, which brought the total reduction to date to 200 basis points.
In a report, ANZ Research said the latest rate cut, which brought the central bank’s overnight reverse repurchase rate to a record-low two percent, aims to address the weak consumer and business confidence and the impact of the global economic uncertainty.
These factors, it said, “have taken precedence over the earlier priority of strengthening policy transmission”.
It also cited monetary authorities’ outlook that economic recovery is now underway, but its success depends largely on the improvement of the public health system, availability of coronavirus disease vaccine, and revival of consumer and business confidence.
The low transmission of previous rate cuts, the slow delivery of fiscal measures, and weak credit growth were cited in the report as unaddressed issues.
“Given today’s turnaround in policy priority, we do not rule out further rate cuts next year. Even so, in our view, its efficacy will be limited by weak transmission,” it said.
ING Bank Manila chief economist Nicholas Mapa said the rate cut targets “to resuscitate falling bank lending and combat the economic recession”.
He said monetary authorities saw the need for the cut given the economic impact of the recent typhoons, which is projected to reduce domestic output this year by around 0.15 percentage points.
Mapa does not consider the latest rate cut to greatly boost bank lending “given the dimming growth outlook with unemployment elevated and consumer sentiment still negative”.
“We believe that BSP will likely pause at its December meeting now that real policy rates have fallen even deeper into negative territory with the central bank likely calling for a renewed push for additional fiscal spending to address the freefall in economic activity as Covid-19 infections remain elevated in the country,” he added.
Rizal Commercial Banking Corp. chief economist Michael Ricafort said limitations of government funding for economic stimulus likely played as among the factors for the latest BSP rate cut.
Ricafort said the latest BSP rate decision “is viewed as a pre-emptive move by the local monetary authorities, as the economy still needs all the support measures that it could get right now (to be) able to further support the economic recovery prospects amid the economic challenges largely brought about by the Covid-19 pandemic/lockdowns”.
He further said this decision would help keep inflation relatively low and address the inflationary impact of the recent typhoons on agriculture.
“Extraordinary economic conditions largely brought about by the Covid-19 pandemic call for extraordinary measures such as more aggressive/pre-emptive monetary easing measures, such as the latest 0.25-cut in local policy rates, that definitely help boost economic recovery prospects, going forward,” he added.