Central bank chief says the Philippines still has ‘plenty of policy space’ following rate cut

The Philippine central bank still has plenty of room to maneuver as the economy faces a downturn in the face of the coronavirus pandemic, according to the institution’s chief.

Central bank governor Benjamin Diokno told CNBC’s “Street Signs” on Monday: “We still have a lot of policy space, unlike other countries where they are now in the negative territory.”

Diokno’s comments followed the Bangko Sentral ng Pilipinas’s (BSP) decision last week to cut its benchmark interest rate by 50 basis points to 2.25%, an unexpected move as most economists in a Reuters survey had expected the central bank to stay on hold. It came after the Philippines’ Development Budget Coordination Committee in May projected an economic contraction by 2% to 3.4% in 2020.

We still have a lot of ammunition … should things get worse.

Benjamin Diokno

Governor, Bangko Sentral ng Pilipinas

Diokno said the rate cut came after the IMF downgraded its forecasts for the global economy. Coupled with calculations from the central bank that showed inflation would be “benign, not only for this year but for the next three years,” the BSP chief said the bank was “prompted” to make a preemptive move as a result.

“Monetary policy works with a lag, so we don’t have to wait for … next month or next quarter to make the policy decision,” Diokno said. He also said its reserve requirement ratio for banks still sits at the “double digit level.”

“We still have a lot of ammunition … should things get worse,” Diokno said.

Peso going ‘quite strong’

Asked if he was concerned over a potential flight to safety strengthening the dollar and bringing more volatility to the Philippine peso, Diokno said his country’s currency is going “quite strong” at the moment.

The peso is supported by a “hefty” amount of gross international reserves, Diokno said, adding there is “strong confidence in the currency.”

The Philippine peso was trading at 49.789 per dollar as of Tuesday afternoon Singapore time. The currency has appreciated more than 1.5% against the greenback so far this year.

Diokno cited an “unprecedented” move by the Japan Credit Rating Agency to upgrade the Philippines to A- from BBB+ at a time recently.

In light of a “wave of credit rating downgrades” elsewhere, he said the move represented a “strong vote of confidence” in the Philippine economy’s ability to bounce back, as well as for the strength of the peso.

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