BSP to pump more cash into local economy

The central bank has vowed to infuse more liquidity into the local financial system at the soonest possible time to help the Philippine economy absorb the adverse impact of the coronavirus pandemic and, more importantly, promote a rapid recovery after the health crisis.

In particular, the Bangko Sentral ng Pilipinas said it stands ready to cut its key interest rate —which financial institutions use as a benchmark for pricing their own loans—and further reduce the amount of cash banks were required to keep as reserves.

“These new realities call for bolder but appropriate moves on the part of the BSP,” Governor Benjamin Diokno said in a mobile phone message to the press. “The challenge is to cushion the impact of the economic slowdown on people, firms and the financial system.”

The central bank chief explained that the BSP raised its overnight borrowing rate by 175 bps in 2018 in response to a spike in the inflation rate at that time, which policy-makers are now in the process of unwinding as consumer prices have stabilized.

“While BSP has cut the policy rate by 150 bps (basis points) since I assumed office last year, the Philippines now faces a once-in-a lifetime crisis,” he said. “It is now clear that reverting to where we were in 2018—policy rate at 3 percent—is no longer an appropriate policy goal.”

“A deeper cut is warranted in response to the expected sharp economic slowdown,” Diokno said, adding that this would be aided by the fact that inflation this year would likely end closer to the lower bound of the 2 to 4 percent target range.

The policymaking Monetary Board also recently gave Diokno the discretion to reduce banks’ reserve requirement ratios by as much as 400 bps, of which he has already implemented a cut of 200 bps for which an estimated P200 billion was released into the financial system.

“The additional 200-bps cut is forthcoming based on available data, the needs of the economy and the utilization of the additional liquidity,” he said.

“The monetary authorities’ job, in coordination with fiscal authorities, is to manage a ‘soft landing’ and ensure that economic takeoff begins quickly once the pandemic fades,” he added. “BSP will continue to be data dependent, keeping in mind that monetary policy works with a lag.”

In addition to these monetary policy initiatives, the BSP last month also agreed to extend to the national government a P300-billion loan through the purchase of Bureau of the Treasury-issued bonds for the latter’s spending activities against the COVID-19 disease.

It also remitted P20 billion in dividends to the state’s coffers. INQ