The Bangko Sentral ng Pilipinas (BSP) or the central bank of the Philippines, said the rate cut is based on the fact that the country's inflation expectations remain within the target range of the government.
Meanwhile, the BSP said the balance of risks to the inflation outlook now leans toward the downside for both 2020 and 2021.
"The uncertainty over the potentially protracted pandemic poses significant downside risks to aggregate demand," the BSP said.
The central bank also noted that while the enforcement of quarantine measures could help in slowing the spread of the virus, the resulting disruptions to industries and private spending are likely to reduce economic growth in the near term.
The Philippine government recently placed the entire country under a state of calamity for six months and implemented the "enhanced community quarantine" in Luzon island to fight against COVID-19.
Based on these rules, the majority of the country is placed under lockdown and people are prohibited to go outside except for essential tasks like getting basic necessities.
BSP said the COVID-19 could negatively impact the Philippines' tourism and trade, overseas Filipino remittances, and foreign investments.
Given these considerations, the BSP said it decided that there is a need for a follow-on monetary policy response to address the adverse spillovers associated with the ongoing pandemic.
With a manageable inflation environment and stable inflation expectations, the Monetary Board said it sees enough policy space for an assertive reduction in the policy rate at this juncture to cushion the country's growth momentum and uplift market confidence amid stronger headwinds.
According to the BSP, the monetary policy easing is also aimed at mitigating the risk of financial sector volatility in light of unfolding global developments by ensuring adequate domestic liquidity and credit in the financial system as well as lowering borrowing costs for affected firms and households.
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