Philippine Central Bank Chief Is Happy Where the Key Rate Is

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Philippine central bank governor Benjamin Diokno said the monetary easing implemented against coronavirus was appropriate, and that further action will depend on the economic recovery.

“Right now, we're happy where the current policy rate is,” Diokno said Wednesday in an interview with Bloomberg. Monetary authorities are ready to use all the tools at their disposal, but are likely to do so only if “there's more bad news.”

As lawmakers debate fiscal stimulus measures, the Bangko Sentral ng Pilipinas has done much of the heavy lifting for the country's virus relief. Monetary authorities have cut the benchmark interest rate this year by 125 basis points to 2.75%, lowered the ratio of funds lenders must hold in reserve by 2 percentage points, eased rules on bank capital and reserves and deployed a bevy of measures to stabilize the bond market. These have funneled an estimated 1.1 trillion pesos ($22 billion) into the financial system, Diokno said.

The governor said negative interest rates are “out of the question” for the Philippines, adding that “some governments would want to have positive real rates.” Economic activity should pick up as businesses reopen, but there's a risk that demand will remain weak as people stay home for fear of catching the virus, according to Diokno, who goes in person to his central bank office several times a week.

Looser Lockdown

President Rodrigo Duterte has begun loosening a lockdown on the capital region that was among the world's strictest. With activity slowing sharply in recent months, the Philippine economy faces its deepest contraction in three decades this year.

“We do believe that Diokno is coming to the end of the line in terms of rate cuts, as he may want to ensure real rates remain positive,” Nicholas Mapa, senior economist at ING Groep NV in Manila. Still, he said, easing access to credit “weighs well more than worrying about what little inflation we're about to face in the coming months.”

Policy makers are scheduled to meet again on the key rate June 25.

The peso extended gains Wednesday, closing 0.5% higher at 50.10 a dollar, its strongest level since January 2018.

Among the governor's other comments:

Bangko Sentral is leaving it up to the country's Treasury to make use of additional repurchase agreements with the government
Bond-buying activities in the secondary market account for just a “small” portion of the 1.1 trillion pesos in additional funds flushed into the financial system by the central bank's actions during the crisis
The central bank participates in the foreign exchange market “only to smooth the fluctuations;” the strength of the peso and other regional currencies is “because of the weaker dollar”
On further cuts to the reserve requirement ratio: “If you listen to bankers, we've done enough. It's a matter of what banks will do. Let's see first what will happen”