BSP says 50bps rate cut possible in one meeting

The Bangko Sentral ng Pilipinas (BSP) on Monday hinted at the possibility of following the Federal Reserve and delivering a 50-basis-point reduction in one meeting, but governor Eli Remolona Jr. said 25 basis points would be the normal reduction.

Asked if the central bank has room to follow suit with the Fed and do a 50-basis-point cut in one policy meeting, Remolona said “I think here is but usually, you’re worried about a hard landing when you consider 50 basis points.”

“If there’s no risk of a hard landing, 25 (basis points), 25 na lang muna (at a time). 25 is normal. 50, medyo takot ka na na baka magka-hard landing (there would be fears that there may be a hard landing),” he told reporters in Manila.

The BSP in August cut policy rates by 25 basis points, bringing the target reverse repurchase (RRP) rate to 6.25%, the overnight deposit rate to 5.75%, and the overnight lending facility rate to 6.75%.

The next policy meeting of the Monetary Board was initially scheduled on October 17, but this will be moved a day ahead to October 16, to cater to meetings with other central banks. The next will be on December 19, which would be the last meeting for the year.

The BSP on Monday also announced initiatives in the capital market in partnership with the Bankers Association of the Philippines (BAP), such as the Peso IRS  overnight reference rate (ORR) which will be based on the variable overnight reverse repurchase rate (RRP) that is set in an active daily auction.

“(The ORR) changes everyday depending on the needs of the banks. The swap is what the bank will be willing to pay a one-month rate to reserve that rate for the next 30 days,” BAP president Jose Teodoro “TG” Limcaoco said in Manila.

“If I think rates are going up, I’ll be willing to pay a one-month rate, because I think the overnight rate will go up every day for the next 30 days so I will be ahead. If I think rates are going down, I should be able to lend at a one-month rate because I think the overnight rates will go down,” he added.

Aside from this, the BSP and the BAP are also working on expanding the government securities repo market to increase trading and provide an alternative benchmark, especially for short-term loan rates.

According to Remolona, the initiatives are set to shorten the lag of monetary policy to six months to a year, versus the current one year to one and a half.

“A benchmark yield curve will help in the pricing of bank loans and corporate bonds, and thus strengthen the transmission mechanism for monetary policy,” he said. —AOL, GMA Integrated News