Low April inflation to give BSP more room to deploy economic boosters

The central bank expects the country’s inflation rate for April — due to be announced by the government on Tuesday (May 5) morning — to remain low and give the monetary regulator enough room to pump more cheap money into the Philippine economy.

Bangko Sentral ng Pilipinas Governor Benjamin Diokno said, however, that he preferred to wait for empirical evidence that earlier reductions in interest rates and banks’ reserve requirements are having the desired effect of promoting growth before putting additional measures in place.

“Clearly, the more benign inflation provides the Monetary Board greater room for easing,” he said in a mobile phone message to reporters.

“However, since monetary policy works with a lag, it would be prudent on the  part of the Monetary Board to see how the aggressive policy measures it has  adopted have been absorbed by the financial system.”

BSP economists expect the April inflation rate to range between 1.9 percent and 2.7 percent, although Diokno noted that the median estimate of analysts stands at only 2 percent.

“If realized, [this] means the third successive month of falling inflation this year,” he said, noting that January consumer price index came in at 2.9 percent; February’s at 2.7 percent and March’s at 2.5 percent.

The BSP forecasts 2020 annual inflation rate to average 2.2 percent, which is lower than its 2.75 percent overnight borrowing rate — an important gap that means financial investors are staying ahead of the rate at which the value of their assets are being eroded by inflation.

Would these numbers give BSP more room for  monetary easing given that the Philippines remained to be in a pandemic crisis?

The central bank chief noted that, in response to the ongoing coronavirus pandemic, regulators have so far cut policy rates by 125 basis points and the reserve requirements of financial institutions by 200 basis points.

In addition, the central bank also allowed new loans granted by banks to micro, small and medium enterprises (MSMEs) to be recognized as an alternative form of compliance with reserve requirements until the end of 2021.

The BSP reduced the credit risk weights of loans granted to MSMEs that are current in status to 50 percent from 75 percent of qualified MSME portfolios and 100 percent of non-qualified MSME portfolios.

“The reduced credit risk weight will be subject to review by end-December 2021,” Diokno said.

“This will enable BSP to assess its effectiveness in channeling funds to the MSME sector before evaluating whether further easing is warranted.”

Notwithstanding all these measures, the central bank chief said the regulator “will continue to monitor market conditions for any emerging risks.”

Edited by TSB