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Philippines: Dovish Diokno to keep rates low ‘for many quarters to come’
MANILA, Philippines — Faster inflation for the past 3 months is not convincing the Bangko Sentral ng Pilipinas (BSP) to reverse course from last year’s aggressive monetary easing that brought record amounts of liquidity to the financial system but risks stoking prices.
“We intend to keep this accommodative monetary policy for long. So interest rates, I think, will be around this level which is around 2% for many quarters to come,” BSP Governor Benjamin Diokno said in an interview with ABS-CBN News Channel.
The central bank chief made the commitment Tuesday morning while state statisticians were releasing data that showed inflation accelerated to 3.5% year-on-year in December, the fastest in nearly 2 years.
The latest uptick sustains an upward trend in prices, something Diokno had downplayed and characterized as merely “transitory” in nature, mainly driven by supply shocks from crop damage when 5 succeeding typhoons slammed in the Philippines from October to November.
Still, Diokno said “inflation at this level is the least of our worry,” adding that a rebound from the pandemic will be just like a “sprint” and signaling intentions from monetary policymakers to continue keeping fund access easy and cheap.
That should be a welcome boost to an economy that likely closed last year at its weakest on record dating back 1985. To counter the pandemic impact, BSP took up the cudgels from an underspending government by lowering interest rates and reserve requirements of banks by 200 basis points each.
In doing so, BSP estimated to have provided the economy P1.9 trillion in new funds, released mainly by lowering bank lending rates and giving banks more money to lend. The strategy, however, has been unsuccessful thus far with bank lending merely inching up 1.9% on-year as of October, the weakest in 14 years.
But Diokno is unperturbed. “The situation is just so liquid right now and it doesn’t make sense to just deposit the money back to the BSP,” he said.
Going forward, Diokno, previously a member of President Rodrigo Duterte’s cabinet, said there is still some space for more stimulus.
“I don’t want to make a commitment but it will depend on inflation level and whether there’s still a need for further monetary easing,” he said.
“We still have some play on the reserve requirement, as you know, I made a promise that I intend to cut the reserve requirement to single-digit level by the end of my term (in 2023),” he added. Big banks are currently required to keep reserves equivalent to 12% of deposits.
But not everyone is convinced BSP would deliver on promises of keeping rates low his year. Emilio Neri Jr., lead economist at Bank of the Philippine Islands, expects price pressures in the coming months to force the central bank to hold rates or even tighten money supply by raising them sooner rather than later.
“Today’s inflation print shows the November 2020 cut wasn’t prudent. Market participants asking for a rate cut will have to wait (until) 2H2021 (second half of 2021) for the possibility of another RRP rate reduction. This is what we mean by volatility arising from overly aggressive cuts,” Neri tweeted.
If there is any consolation for the likes of Neri however, Diokno said BSP is currently not considering bringing rates to negative level. This essentially means central bank charging banks that park their funds with the BSP, with the intent to influence them to go out and fund economic activities. This, however, risks fanning inflation further
“We still have some room for conventional monetary policy,” Diokno said.
Source: https://www.philstar.com/business/2021/01/05/2068363/dovish-diokno-keep-rates-low-for-many-quarters-come