Diokno says BSP able to balance capping inflation, promoting growth

MANILA, Philippines—The record amount of liquidity injected by the Bangko Sentral ng Pilipinas (BSP) into the local economy in response to the pandemic has neither caused the current spike in inflation nor instability in the financial system, the BSP said on Thursday (Feb. 18).

At an online press briefing, BSP Governor Bejamin Diokno said the agency has so far carefully striven to preserve a balance between providing non-inflationary monetary policy support to the economy and ensuring the continued soundness of the banking system.

“At this juncture, the BSP believes that we are not experiencing a trade-off between accommodative monetary policy and financial stability,” he said.

“This is based on three factors,” the central bank chief explained.

“First, the uptick in inflation in January 2021 is attributed primarily to transitory supply-side pressures,” Diokno said. “Second, BSP measures are aimed at ensuring economic recovery and limiting the pandemic’s potential scarring effects in the long run,” he said. “Third, there is no evidence of increased risk-taking by financial institutions at this time,.”

Diokno noted that the current inflation environment, although elevated, continues to allow the BSP to maintain its accommodative monetary policy stance.

Central bank planners see the recent inflation uptrend as largely “transitionary”, reflecting the impact of base effects, weather-related disturbances and the African swine fever outbreak on a narrow range of food items, as well as higher global oil prices.

With demand pressures remaining largely subdued, and with inflation expectations holding firm within the 2-4 percent target band, the BSP has scope to maintain monetary policy support to the economy to strengthen overall demand and shore up market confidence, Diokno noted.

At the same time, with ample liquidity in the financial system, the BSP observed that banks have remained prudent, as concerns over asset quality, profitability, and the broader economic outlook have resulted in tighter credit standards.

Given the continuing monetary and fiscal policy interventions, however, the BSP expects credit activity to gradually improve in the coming months, especially as the mass vaccination program in the country gets underway.

In the meantime, regulatory relief measures remain in place should financial institutions need recourse from adverse conditions, even as the BSP continued to be on the lookout for potential threats to the overall health of the financial system.

“The BSP shall remain vigilant to help ensure that its policy responses will neither lead to excessive inflation nor result in threats to financial stability,” Diokno said.

TSB