Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno reiterated Monday that the Monetary Board will continue its accommodative policy stance as a growth and market stimulus.
“The BSP believes that keeping monetary policy sufficiently accommodative amid a benign inflation environment will continue to mitigate strong downside risks to growth and boost market confidence,” Diokno said during an online briefing for the second quarter inflation report.
Diokno also said that the “continued stabilization of domestic liquidity dynamics has allowed the BSP to gradually reconfigure its monetary operations.”
The BSP chief said that the impact of the COVID-19 health crisis will “become more apparent” in the second quarter 2020, after a 0.2 percent contraction in the first three months.
He cited the latest composite Purchasing Managers’ Index (PMI) results which “fell below the expansion threshold as all surveyed industries reported weaker demand and lower output” such as the manufacturing sector which had slower production orders because of low capacity utilization.
The BSP’s inflation report noted that “higher frequency indicators suggested a weakening in domestic demand” as shown by the PMI for June.” The preliminary PMI was below the expansion threshold, although the results of the survey also pointed to some degree of improvement as more businesses re-opened following the gradual easing of lockdown and quarantine measures in most parts of the country.
Real estate prices showed modest increases, even as a slowdown in leasing activities for office spaces had been noted. Meanwhile, new vehicles sales and energy usage declined notably,” according to the report.
In anticipation of slower growth, the BSP has reduced the interest rate by 175 basis points (bps) and also reduced the reserve requirement ratios for big banks and quasi-banks by 200 bps.
The central bank’s monetary operations were also tweaked while on lockdown, such as the term deposit facility which were temporarily suspended and now back to full tenor auctions, and the reduction in the overnight reverse repurchase offerings.
“All these monetary responses were possible largely because of the ample policy room afforded by a benign inflation environment and well-anchored inflation expectations,” said Diokno. The inflation rate averaged 2.3 percent in the second quarter, lower than 2.7 percent in the first quarter. The balance of risks to the inflation outlook remains on the downside for the next three years or 2020 to 2022 since the pandemic will further to dampen demand and output.
Diokno said continuing measures to “bolster economic activity and support financial conditions” are needed still. “With the easing of quarantine measures in the country since May, we believe that the BSP’s monetary policy actions and other relief measures will continue to gain traction and support the slow yet sustainable recovery of the domestic economy. In particular, the BSP’s decisive actions have helped restore some calm in the domestic financial market.”
“Optimism over the country’s response to the pandemic has been reflected in the stability of the peso,” he added. “While trading in the equities market has remained volatile, activity in the government securities market has strengthened. Indeed, bond issuances by the NG (National Government) have been consistently oversubscribed, thus pushing yields down in line with the reductions in the policy rate.”
Last week, Diokno said the accommodative policy stance is more to do with managing long-term uncertainties during the pandemic, rather than their outlook on inflation.
The relatively benign inflation outlook has provided the BSP this policy space. As of end-June, inflation has averaged at 2.5 percent, within the government’s two-four percent target. For 2020, the BSP forecasts 2.3 percent inflation and 2.6 percent for 2021.