BSP vows to keep interest rates low if necessary


The faster recovery in more advanced economies and possible early start towards normalization will not necessarily translate to a similar monetary policy stance for the Philippines which intends to keep interest rates low in support of growth, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.

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

And, despite the uneven growth across countries depending on how fast and efficient COVID-19 vaccines will be deployed, Diokno said the BSP will stick to its data-dependent accommodative monetary policy settings until GDP shows convincing signs of a recovery. He’s said this could happen by mid-2022.

 “The BSP does not need to calibrate its policy settings in sync with the US Fed’s (Federal Reserve) policy decisions,” he said.

Diokno also said that timing is crucial in the face of some future pressures to move interest rates following major central banks’ actions to normalize policy settings.

 “The BSP will continue to be data-dependent, guided by its inflation and growth outlook over the policy horizon, as well as the risks, including developments on the external front, on liquidity and financial conditions,” he said. “This will help us determine, not only the type of response that will be needed from monetary authorities, but also the precise timing on when these measures need to be deployed.”

For now, Diokno remains confident that the BSP’s accommodative actions are appropriate. The key rate has been steady at two percent despite higher inflation, the lowest benchmark rate in BSP history, and likely to remain at this level for the rest of 2021.

Keeping the policy rates at two percent will help economic recovery, particularly since major parts of the country are under stricter lockdown to allow the overwhelmed health sector time to recoup and to better cope with the high number of COVID-19 cases.

Based on the most recent World Economic Outlook report of the International Monetary Fund (IMF), it noted a high degree of uncertainty of recovery projections because of possible downside and upside risks. It all depends on the “race between the virus and vaccines.”

“Greater progress with vaccinations can uplift the forecast, while new virus variants that evade vaccines can lead to a sharp downgrade. Large divergences in recovery speeds also raise the prospect of divergent policy stances. In recent months, we have seen sharp increases in long-term interest rates, partly reflecting revised market expectations of the pace at which the US Federal Reserve will normalize policy as the growth outlook for the US economy improves,” according to the IMF.

The IMF said that if US rates increases are “orderly and reflect stronger growth expectations” these will not adversely effect other countries. “But if increases instead reflect a sense that advanced economy monetary policy stances will need to tighten abruptly as the recovery gathers momentum, then there could be adverse spillovers to emerging market and developing economies, particularly among those with high debt and large financing needs. This could set those economies back even further relative to advanced economies.”

“Averting divergent outcomes will require, above all, resolving the health crisis everywhere. At the same time, economic policies will need to limit persistent damage, secure the recovery, and prepare for the post-COVID world, while being mindful of available policy space,” said the IMF.