BSP: No ‘trade-off’ in accommodative policy

Published February 19, 2021, 7:00 AM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said there is no “trade-off” in maintaining an accommodative policy stance where there is low interest rate and increased money supply in the financial system.

Diokno continued to assure the market that as far as BSP is concerned, there is also no sign of asset price bubbles or increased risk-taking by banks and non-banks since the relative absence of credit demand is curtailing “excessive risk-taking and asset price inflation.”

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno ( Bloomberg file photo)

“At this juncture, the BSP believes that we are not experiencing a trade-off between accommodative monetary policy and financial stability,” he said during his weekly “GBED Talks” with the press.

Diokno said that under normal circumstances, a low interest rate environment and increased liquidity in the financial system would pose a dilemma for central banks.

“While an accommodative stance could help support non-inflationary growth, it could also lead to excessive credit growth and asset price bubbles. This is currently not that case,” he reiterated. “And we at the BSP believe that we are not experiencing such a trade-off between monetary accommodation and financial stability.”

Diokno said one of three factors that shows the BSP continue to balance an accommodative policy and financial stability is a supply-side driven inflation uptick on oil and meat prices for the month of January, which the BSP said is transitory.

“(The) higher inflation has not been demand driven, as the economy is still recovering from the health crisis. Put differently, the elevated inflation trajectory over the past couple of months has been driven mainly by supply-side forces,” he said. Inflation rate breached the two-four percent target in January due to a recovery in global oil prices, bad weather and the African Swine Fever outbreak. Diokno said there is limited evidence of second-round effects, thus far.

Diokno said the second of three factors for the non-existent trade-off is that while BSP has injected almost P2 trillion of additional liquidity in the pandemic-hit financial system, these measures are only temporary and “aimed at ensuring economic recovery and limiting potential scarring effects in the long run.”

As for cutting the policy rate by 200 basis points, he noted that “(the) market interest rates have declined in line with the cumulative 200-bps reduction in the policy rate in 2020.” He said they expect this to “support increased lending and borrowing activity in the coming months as sentiment improves and economic activity recovers.”

Finally, the BSP chief said there is no evidence as well of aggressive risk-taking by financial institutions “so far” with low credit demand and tightening of banks’ lending standards. He said “extending loans serves as a primary means for banks to take on more risk and increase their earnings” but at the moment, “credit activity remains weak due to banks’ heightened aversion to risk on concerns over asset quality and profitability. Moreover, businesses and households are reluctant to borrow given declining profits and rising unemployment amid the crisis.”

On the issue of asset price pressures, Diokno said the BSP is not expecting any “undue surges” in asset prices. He said property prices for both office and residential segments “have come down recently” with “dampened demand” due to the pandemic. “This lessens the risk of an asset bubble,” he said.

“While we expect asset price inflation to remain manageable, the BSP continues to closely monitor market conditions for signs of imbalances or the potential presence of asset bubbles. We would like to emphasize that even before the pandemic, the BSP has already put in place various macroprudential measures to help safeguard against property price bubbles,” said Diokno.