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Philippines: BSP hints at rate pause
MANILA, Philippines — Monetary authorities are likely to maintain interest rates at record lows as the economy has yet to recover from the impact of the COVID-19 pandemic, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno. In his weekly online press briefing, Diokno said the withdrawal of liquidity-enhancing policy measures is unlikely this year as the country is seen fully recovering from the pandemic-induced recession only next year.
“It is too early to talk about an exit strategy at this time. We share the view that 2021 will be a recovery year and that the economy won’t be back to its 2019 level until perhaps the second half of 2022,” Diokno said.
The BSP emerged as one of the most aggressive central banks in the world last year after slashing interest rates by 200 basis points and lowering the reserve requirement ratios of banks.
The central bank’s Monetary Board has kept the benchmark interest rate at an all-time low of two percent since the surprise 25 basis points reduction last Nov. 19.
Despite the aggressive easing and massive liquidity in the financial system, loan disbursements contracted for the second straight month with 2.4 percent in January as banks remained risk-averse and because of lack of demand owing to the global health crisis.
Other COVID-19 response measures that unleashed P2 trillion into the financial system include the P300 billion repurchase agreement with the Bureau of the Treasury, the
P540 billion provisional advance to the national government, the purchase of government securities in the secondary market, the regulatory relief measures extended to banks, among others.
Diokno said a carefully formulated exit strategy from policy measures against the effects of COVID-19 would enable the BSP to have a clear guide to future actions when the economy fully recovers and growth becomes sustainable.
“That said, the BSP’s monetary policymaking remains data driven and the timing of the exit from stimulus will primarily depend on the future trajectory of domestic inflation and economic growth,” he said.
Monetary authorities expect inflation to remain manageable at four percent this year before easing to 2.7 percent next year despite breaching the BSP’s two to four percent target in the first two months of the year amid supply-side shocks.
“At present amid a manageable inflation outlook, subdued demand pressures and within target inflation expectations, the BSP has scope to preserve monetary policy support to the economy to help strengthen overall demand and shore up market confidence,” Diokno said.
Economic managers penned a rebound this year with a gross domestic product (GDP) growth of 6.5 to 7.5 percent this year after a record contraction of 9.5 percent last year when the economy stalled after the Philippines imposed one of the longest and strictest lockdowns in the world to slow the spread of COVID-19.
“As I mentioned when the economy reaches full recovery, the BSP will aim to implement pre -planned strategy for the withdrawal of accommodative monetary policy measures, taking care to ensure the sustainability of recovery, while also guarding against any emerging threats to the BSP’s price and financial stability objectives,” Diokno said.
For now, the BSP actively takes part in international discussions that tackle central banks’ policy interventions and exit strategies in the post-pandemic period.
“Like many central banks, the BSP recognizes the need for a carefully-formulated exit strategy from the liquidity-enhancing policy measures against the effects of COVID-19. Such an exit strategy serves as a framework to guide the actions of the central bank and anchor public expectations,” he said.
In the fora, the BSP said central banks’ blueprints for exit strategies tend to be grounded mainly on domestic macroeconomic conditions and institutional characteristics.
For the BSP, monetary policy settings continue to serve as a complement to fiscal measures, which remain a cornerstone of the economic recovery, by ensuring that the financial system remains adequately liquid and fully functioning.
Source: https://www.philstar.com/business/2021/03/25/2086728/bsp-hints-rate-pause