Focuses on non-inflationary growth

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno is ensuring a smooth normalization process as the Philippine shifts to the pandemic-induced “New Economy”, balancing money and credit growth, fiscal stimulus, low interest rates in a non-inflationary package.

“The health crisis has required central banks to be nimble,” said Diokno, particularly since COVID-19 pandemic “had a solid and fast influence on domestic and global demand.”

“The inflation decline in other countries led to increased pressure for central banks to adopt further measures, including unconventional ones, to stimulate their respective economies (and the) crisis has also taught us that there are limits to what monetary policy and unconventional central bank measures can do,” noted Diokno. “When interest rates are low and private demand are weak, as is the case during this pandemic, the transmission from financing conditions to private spending might be limited.”

The BSP is up to the task, it is one of the first central banks in the region to cut policy rates to a cumulative 200 basis points (bps) as of November 19, it injected P1.9 trillion fresh liquidity in the financial system to support an economy in recession, and it released several sets of anti-pandemic measures in support of banks, businesses, and households.

For the BSP, Diokno said the pandemic has made it clear that the expected impact of policy rate cuts and also the reduction in reserve requirements on market rates and banks’ funding costs could “take a longer time to materialize.”

Still, inflation targeting even amid the pandemic, is BSP’s primary mandate to ensure inflation continues to be manageable. If they do this right, growth and employment is sustainable. Ensuring low and stable prices will help facilitate economic recovery and employment opportunities, said Diokno.

“This is critical during this pandemic, when changes in economic conditions tend to be abrupt and unpredictable, and tend to have lingering effects,” he added.

Diokno said the BSP remains focused on price stability but at the same, also staying on top of risks that will undermine financial stability that the expansion of money and credit, the low interest rates with the benchmark now at a record two percent “will not lead to excessive inflation nor result in greater financial stability risks.”

“When domestic developments warrant a recalibration of policy support, the BSP will aim towards a smooth normalization of its time-bound measures. This is consistent with the BSP’s data-driven approach to the conduct of monetary policy,” said Diokno.

The BSP has the flexibility and the monetary space to support the economy but emphasizes that medical and macroeconomic interventions should go hand in hand to protect public welfare and instill confidence in the market.

BSP Deputy Governor Francisco G. Dakila Jr., for his part, said that for sometime now, since the virus outbreak, the BSP’s policy stance has been accommodative. “We expect that it will remain (accommodative) in the coming months” or until the economy recovers from the impact of the pandemic.

Dakila said they are monitoring possible downside risks to economic activities that have increased such as those coming from resurgence in COVID-19 cases across the globe. This continues to feed uncertainty and dampen market sentiment, he said.

The BSP’s recent 25 bps cut to policy rate should “help shore up market sentiment as we brace (for when) downside risks materialize,” said Dakila.

There is still much uncertainty prevailing in the markets because of the pandemic, and how soon this will be resolved or economic activity to resume will depend on the development of the COVID-19 vaccine and the strengthening of the public health system, said Dakila.

In deciding to cut interest rates anew last week, Dakila said the BSP was looking at an improved third quarter GDP outturn of -11.5 percent compared to the second quarter’s -16.9 percent, and “this is projected to continue in the fourth quarter,” he said. “We’re still anticipating the economy will contract in the fourth quarter but (in a) more moderate rate.”

Inflation is an average 2.5 percent year-to-date, still within the government target for 2020 of 1.75 percent to 2.75 percent, and two-four percent for 2021 and 2022. The GDP is expected to bounce back to 6.5 percent to 7.5 percent in 2021 and 2022.