Philippines CB rate cut in line with expectations, seen no impact on real economy

The Central Bank of Philippines, Bangko Sentral ng Pilipinas (BSP) eased its monetary policy, slasing interest rates by 100 bps to 3.0 pct in preparation for the introduction of the Interest Rate Corridor on June 3. The decision came in line with expectations, HSBC reported.

The BSP also cut the lending rate, which is currently not used given surplus liquidity in the financial system to 3.5 pct and left the deposit rate unchanged at 2.5 pct, thus creating a corridor width of 100bps.

The changes are meant to be policy neutral. The introduction of term deposits with 7 and 28-day tenors will likely yield more than the deposit rate of 2.5 pct (the current SDA), which should offset the impact of a lower policy rate, HSBC reported.

"The changes are not expected to have any economic implications over the short-term, but over time should result in a more effective monetary policy transmission and increase money market activity as the Philippines continues to liberalize and open its financial markets," HSBC commented in its recent research report.

Governor Tetangco highlighted that the Reserve Requirement Ratio, currently at 20 pct and according to him "one of the highest in the world" may be cut, but only after the implementation of the Interest Rate Corridor, Bloomberg reported in a May 16 publication.

"We don't believe the BSP's new monetary policy framework will have a significant impact on the PHP immediately," HSBC commented.

Meanwhile, the apex bank’s willingness to further cut the RRR once the Interest Corridor is implemented officially reflects the country’s currency performance in this regard.