BSP keeps interest rates at all-time low of 2.25%

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Metro Manila (CNN Philippines, August 20) — The Bangko Sentral ng Pilipinas on Thursday kept interest rates at an all-time low.

The Monetary Board voted to retain the key interest rate at 2.25 percent, the lowest on record as the Philippine economy reels from the impact of lockdowns amid the COVID-19 pandemic.

Banks and other lending firms use the BSP's rates as their benchmark in setting loan, credit card, and deposit rates. The central bank cumulatively brought the key yield down by 1.75 percentage points in the last three months.

BSP Governor Benjamin Diokno said the "prudent pause" will allow previous interest rate cuts and other monetary interventions to "fully work their way through the economy."

​The central bank stood pat on yields as inflation remained "benign" despite a faster pickup in prices during the past two months and higher fuel costs, he said in an online briefing for the media.

READ: Gov't sees PH economy shrinking by 5.5% in 2020 with deeper slump, return to MECQ

Inflation estimates had to be raised to 2.6 percent for 2020 from 2.3 percent previously, but these still fall within the 1.75-3.75 forecast range.

Projections have also been scaled up to 3 percent for next year and 3.1 percent for 2022.

The central bank's decision comes two weeks after the government announced that the economy shrunk by 16.5 percent in the second quarter, the steepest fall since at least 1981.

Global economic outlook remains subdued and uncertain as COVID-19 cases see a "resurgence" even in other countries. Confirmed cases have been rising by the thousands each day in the Philippines in recent weeks.

"At the same time, the Monetary Board observed early signs of recovery in domestic economic activity with the gradual easing of lockdown restrictions, supported by ample liquidity in the financial system," Diokno said in the briefing.

The government expects a gradual rebound to growth by next year. However, Metro Manila and nearby provinces of Bulacan, Rizal, Laguna, and Cavite — the biggest economic hubs — returned to strict stay-at-home rules for two weeks this August, the effects of which remain to be seen.

Meanwhile, BSP Deput​y Governor Francisco Dakila, Jr. said the Monetary Board did not adjust banks' reserve requirement ratios given sufficient money supply. He pointed out that loans to small firms have substantially climbed since the central bank relaxed rules so that lenders can extend more credit to the sector.

"When we look at what would be the major constraint in demand, it will not be the supply of credit but rather the need to address the pandemic as a key to rebuilding market confidence," Dakila said, adding this would the key to recover household spending – the backbone of the local economy.

"Monetary policy cannot push on a string – meaning no amount of monetary easing or liquidity injections can push businesses and consumers to spend if the confidence is not there," BSP Director Dennis Lapid added, noting that government's health response is mainly the focus, alongside fiscal interventions.

Market watchers await the size and types of stimulus measures, which need to be passed by Congress for funding.

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The central bank has unleashed liquidity-boosting measures since lockdowns started in March, hoping to prop up economic activity even as most establishments had to shut down to curb infections.