Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the BSP will use all types of forward guidance to help calm markets by providing a credible and clear direction of monetary policy especially as conditions change with the eventual normalization of US and European interest rates.
The BSP’s Monetary Board has been known to give “purely qualitative forward guidance” which are “broad statements that give an overview of the likely future path of monetary policy” such as when they say – as the BSP often does – that it remains “keen on sustaining monetary policy support for as long as necessary in order for the momentum of economic recovery to gain more traction as well as to help boost domestic demand and market confidence, especially as risk aversion continues to temper credit activity.”
“Forward guidance is a policy tool that enhances the effectiveness of monetary policy by steering interest rate expectations and reducing market uncertainty,” said Diokno. “We apply the three ways of forward guidance,” he told reporters during a recent online press chat.
The most common BSP forward guidance is when they say the central bank “stands ready to adjust its policy settings as needed to ensure price and financial stability conducive to a sustainable economic recovery.” As such, the benchmark interest rate which is the overnight reverse repurchase facility (RRP) has remained steady at the record low of two percent since November 2020.
Diokno said however the Monetary Board is not just about making broad statements and would subtly use the other two types of forward guidance applied by the US Federal Reserve or the European Central Bank which are state-contigent or time-contigent forward guidance.
Unlike the purely qualitative forward guidance, foreign central banks would often use state-contingent forward guidance which has specific conditions that should happen before any monetary policy action will take place such as when the inflation rate hits a certain level.
Time-contingent forward guidance, on the other hand, makes use of predetermined dates before adjusting monetary policy settings. This policy guidance approach would take actions in doses as per the announced time period.
BSP Managing Director Zeno R. Abenoja said the BSP does employ all three types of forward guidance as needed.
“There’s no preference for one or the other. It depends on the situation and issue that we are talking about,” he replied when asked if the BSP will progress to pronouncements in the future in the nature of time-contingent forward guidance such as when US Fed chairman Jerome Powell in the Jackson Hole economic symposium said it would be appropriate to start reducing the asset purchases in 2021.
“Right now there’s a lot of uncertainty including the shocks to the economy and (a forward guidance) that is broad and flexible would be very useful in this scenario,” said Abenoja. He also said that aside from the Monetary Board, BSP officials and departments of the BSP provide all necessary information to the public with regards to its monetary policy direction.
“We think this is an important way to balance our stance in providing information while also being flexible,” he added, also stressing that the BSP strives to avoid confusion in communicating their future policy actions.
Diokno said they continue to closely monitor external developments and major central banks’ forward guidance that could “impact domestic inflation dynamics and capital flows” but he assured the markets that the recovering local economy is “well-placed to weather an environment of tighter global financial conditions when the US eventually normalizes its monetary policy stance (and as) has been a long-standing practice, BSP’s policy decisions are based on prevailing domestic fundamentals.”
“To reduce uncertainty, enforce market confidence, and foster sustainable economic growth, the BSP will continue to provide timely and consistent forward guidance to the public,” said Diokno.
Diokno said earlier that the Monetary Board policy actions will focus more on domestic outlook risks and not so much on external factors. The BSP “does not need to recalibrate its policy setting based on these external factors,” he said.
Diokno said monetary policy will continue to be supportive until the economy shows more definite signs of sustained recovery. The economy is expected to return to pre-pandemic growth path by the first quarter of 2023, according to the BSP chief.
He also reiterated that the timing of when to unwind monetary stimulus will be crucial and will be communicated properly to the market.
Diokno said the timing as well as the conditions under which the BSP will start unwinding monetary stimulus will continue to be guided by inflation and growth outlook over the medium term.
Last week, Diokno has also hinted that the BSP will likely not allow the peso to breach P53:$1 as pressures mount with the US Fed’s hawkish assertions.
“The BSP can use its wide range of monetary policy tools to deal with any short-term volatility, including foreign exchange market participation,” he said.
When asked if the exchange rate will keep to below the P53 level despite some expected depreciation pressures from the US Fed funds’ rate lift-off, Diokno said the peso will remain within the government assumption range of P48 to P53. “However, the real impact on emerging economies will mainly come when US policy rates start to increase,” he said.
The BSP does not release any forecasts for the exchange rate, but for the purpose of setting the National Government budget, the government and the BSP has a peso-dollar rate assumption of P48 to P53 until 2024. The peso closed at P49.86 on Friday. Market watchers said a sustained breach past P50 is likely in the near term.