​A surprise rate cut

PHILIPPINES - In Brief 19 Nov 2020 by Romeo Bernardo

The Monetary Board made a surprise interest rate cut today, reducing key policy rates by 25bp which brought the overnight RRP rate to 2%. Judging by the officials’ statements during the press conference, the rate cut appears to be aimed at counterbalancing the impact on market sentiments of several pieces of bad news lately, including the resurgence of coronavirus infections globally, the higher-than-expected GDP contraction in Q3 and the recent typhoons and excessive flooding in Metro Manila and other parts of the Luzon island. Per officials, downside risks to economic activity have increased and the policy accommodation will help shore up market confidence and facilitate recovery should these risks materialize. On its own, the rate cut is unlikely to spur more lending, which the BSP official recognized stressing that it is necessary to first contain the spread of the coronavirus and lift sentiments. Reflecting the impact of new data, i.e., economic growth and supply disruptions due to the typhoon, on domestic prices, the BSP nudged up its inflation forecast for the year from 2.3% to 2.4%, while lowering forecasts for 2021 (from 2.8% to 2.7%) and 2022 (from 3% to 2.9%).

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