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Policy rates remain high inflation buffer

BSP’s prior liquidity enhancing measures and accommodative monetary policy continue to provide significant support to the financial system



While the Bangko Sentral ng Pilipinas’ (BSP) monetary policy stance has remained accommodative, with key interest rates kept at 2 percent since the start of the year, such a move was done in consideration of the current state of the economy.

BSP Governor Benjamin Diokno earlier said while the local economy continues to recover — such remains “fragile” hence, the need for a cautious recalibration of their policy.

“We’re on our way to recovery, although it’s still fragile. I think we’ve learned our lessons… and I think we’re doing well on the vaccination front… that’s far from (a) doomsday scenario,” Diokno said.

According to him, the central bank will continue to provide the necessary monetary policy support to bolster faster economic recovery.

“The BSP’s prior liquidity enhancing measures and accommodative monetary policy continue to provide significant support to the financial system,” he explained.

“Credit activity may also turn around. However, heightened risk aversion amid increasing risks to corporate and household balance sheets continues to dampen lending activity,” he added.

The BSP chief cited an accelerated vaccine rollout along with the implementation of public health protocols as tools to contain the spread of the coronavirus — which in turn, will restore market confidence.

“The sustained recovery of the economy as well as the prevention of permanent scarring effects require that the heavy lifting should come primarily from fiscal policy,” he said.

Proper timing needed
The BSP chief said recalibrating the monetary policy will require “appropriate timing” as adjusting such too early would cause more harm than too soon.

“To me, the harm that tightening monetary policy too soon exceeds the harm of moving too late, given that the Philippine economy is at its nascent state of economic recovery,” Diokno explained.

“In any event, based on the evidence at the time of its decision, the Monetary Board will decide on the appropriate timing of its policy change. It won’t be influenced by opinion makers, market analysts or Twitters,” he added.

Likewise, the BSP chief said the country remains ready for the potential impact of the tapering in the US Federal Reserve’s rates.

“There are some indications that the tightening will happen sooner rather than later. That does not concern us at the moment because I think we are adequately protected,” Diokno said.

“We’re ready… we don’t have the risk of payments outflow of foreign exchange and even that, we have the tools, we have the hefty gross international reserves and our policy and flexible exchange rates are our first line of defense,” he added.

Adjustment seen
Fitch Solutions in its earlier report said the central bank might begin to calibrate its monetary policy rates in 2022 and may reach as high as 75 basis points.

“We at Fitch Solutions forecast the BSP to begin its hiking cycle in 2022, forecasting the policy rate to rise from 2 percent as of end-2021 to 2.75 percent by end-2022,” Fitch said.

“For now, we expect the BSP to look past elevated inflation and to the economic recovery. In addition, we expect credit demand to pick-up heading into 2022, reducing the need for the unprecedented monetary accommodation from the BSP,” it added.

Various private economists shared the same sentiment, citing better economic conditions in 2022 will allow the BSP to finally make adjustments in its key interest rates.

To date, economists see key policy rates to remain at 2 percent in the near-term to support the economy’s eyed recovery.