AMRO says impact of BSP rate adjustments are delayed, limited

THE TRANSMISSION of the Bangko Sentral ng Pilipinas’ (BSP) monetary policy adjustments into the financial system remains delayed and limited, a report from the ASEAN+3 Macroeconomic Research Office (AMRO) showed.

“Since the introduction of an interest rate corridor (IRC) in 2016, the Philippines has improved monetary policy transmission, with short-term market rates responding more quickly to policy rate changes,” AMRO Senior Economist Andrew Tsang and Associate Economist Chiang Yong “Edmond” Choo said in an analytical note released on Wednesday.

In June 2016, the central bank adopted an IRC system, which served as its framework for guiding short-term market rates towards its key interest rate or the target reverse repurchase rate. The system introduced the overnight lending facility and the overnight deposit facility.

“However, transmission remains slow and limited for long-term bond yields, deposit rates, and bank lending rates — especially for MSME (micro, small, and medium enterprises) and consumer loans,” Mr. Tsang and Mr. Choo added.

Based on the report, loan rates are usually adjusted within half a month after policy rate changes, faster than those seen with deposit rates.

Meanwhile, AMRO noted that banks’ savings deposit rate and longer-term bond yields react better to policy easing than rate hikes.

“Asymmetric monetary transmission for bank interest rate channels between tightening and easing cycles is both observable and statistically significant, and is mainly attributed to banks’ business decisions,” it said.

Last week, the central bank slashed the benchmark interest rate by 25 basis points (bps) for a fifth straight meeting, bringing it to an over three-year low of 4.5%. This came amid a slowdown in third-quarter growth and a clouded growth outlook in the medium term.

BSP Governor Eli M. Relomona, Jr. has said that rate cuts typically have a one-and-a-half to two-year lag before reflecting on the economy.

Such gaps, the AMRO economists said, call for reforms in the country’s credit information systems and capital markets, among others, to realize monetary policy decisions’ economic impact.

“This underscores the need for further reforms, including strengthening credit information systems to actively integrate them into banks’ lending practices, as well as deepening capital markets by channeling more domestic and foreign savings into those markets, syncing regulations across investment schemes, reducing withholding taxes to broaden the investor base, and advancing regional financial integration, so as to enhance the effectiveness and timeliness of monetary policy,” Mr. Tsang and Mr. Choo said. — Katherine K. Chan