BSP policy stance ample support for recovery – Diokno

Published September 5, 2020, 5:00 AM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said yesterday they continue to assess and review monetary transmission to ensure that the accommodative policy stance and liquidity surplus will effectively support the recovering economy.

“The prevailing interest rate environment and ample liquidity in the financial system, reflecting the significant monetary policy easing and liquidity enhancing measures undertaken thus far by the BSP, are seen to provide sufficient support to economic activity,” said Diokno on Friday. 

“Early signs of recovery in domestic activity are being noted, with further improvements expected as containment measures are relaxed further, and firms and households adjust better to the post pandemic operating environment,” he added.

 Diokno said the BSP “will continue to evaluate the transmission of the BSP’s policy actions to the economy along with the recently approved fiscal measures to address the public health crisis.

 At 2.25 percent central bank policy rate which was the lowest in BSP history, and with the 2.4 percent latest inflation for the month August, the BSP chief said the current monetary policy stance remains appropriate. The latest consumer price data is lower than the BSP’s 2.5 percent to 3.3 percent forecast range for the month.

 “The August inflation of 2.4 percent is lower than the BSP’s assessment but is consistent with the expectation that inflation will remain benign over the policy horizon. The balance of risks tilts toward the downside owing largely to potential disruptions to domestic and global economic activity of the ongoing pandemic,” noted Diokno.

 The BSP has revised higher its inflation forecast for this year to 2.6 percent from 2.3 percent (from the June 25 Monetary Board policy meeting), and also increased the 2021 and 2022 forecasts to three percent from 2.6 percent, and 3.1 percent from three percent.

 The government expects inflation to settle within the range of 1.75 to 2.75 percent this year adjusted from its previous two-four percent target, because of the pandemic which resulted to a stalled economy and the recession. For 2021 and 2022, the BSP target is still two-four percent.

The benign inflation environment has enabled the BSP to keep interest rates low which is already in negative rate in real terms. The Monetary Board has cut the interest rates by a cumulative 175 basis points since February but in its August 20 policy meeting, the BSP opted to keep the key rate unchanged at 2.25 percent.

 The monetary transmission mechanism has a lag period of nine to 12 months under the interest rate corridor (IRC) system that the BSP adopted in mid-2016. Before the IRC, the lag period – which is the time it will take for any policy rate revisions to actually effect the economy – was 12 to 15 months.

 The IRC is a system that will bring short-term market rates closer to the benchmark rate or to influence it to “move within a reasonably close range around the BSP’s policy rate” which is the basis for the monetary transmission.