BSP starts planning to unwind P2-T cash stimulus in post-pandemic economic recovery

MANILA, Philippines—The Bangko Sentral ng Pilipinas (BSP) has begun formulating exit strategies, with the help of international counterparts, to wean the Philippines away from a historic low interest rate regime in case the COVID-19 pandemic ends, according to the BSP head.

At an online press briefing, BSP Governor Benjamin Diokno said enforcing well-timed monetary policy measures when the economy recovers will help keep inflation in check and financial markets stable.

Of particular concern to the BSP is how to unwind the liquidity it has unleashed since the start of the COVID-19 health crisis, now estimated at P2 trillion, in a manner that would neither derail recovery or cause the economy to overheat.

“When the economy reaches full recovery, the BSP will aim to implement a preplanned strategy for the withdrawal of policy stimulus, taking care to avoid unwinding policy measures either too early or too late,” the central bank chief said.

“This is to ensure the sustainability of the economic recovery while also guarding against any emerging threats to the BSP’s price and financial stability objectives,” he added.
To this end, the BSP is actively taking part in international discussions on central banks’ policy interventions and exit strategies in the post-pandemic period.

Diokno said the agency is participating in forums with foreign counterparts on COVID-19 exit strategies “because alongside a well-coordinated national policy, joint measures at the global level can help bring about a stronger and more sustained economic recovery.”

“Like many central banks, the BSP recognizes the need for a carefully-formulated exit strategy from the liquidity-enhancing policy measures against the effects of COVID-19,” he said. “Such an exit strategy serves as a framework to guide the actions of the central bank and anchor public expectations.”

In one such forum, BSP officials noted that central banks’ blueprints for exit strategies tend to be grounded mainly on domestic macroeconomic conditions and institutional characteristics.

For the BSP, monetary policy settings continue to serve as a complement to fiscal measures, which remain a cornerstone of the economic recovery, by ensuring that the financial system remained adequately liquid and fully functioning.

Consistent with the BSP’s data-driven approach to policymaking, the timing of exit of monetary policy measures will primarily depend on the evolution of domestic factors, particularly the outlook for inflation and economic growth.

At present, amid a manageable inflation environment, subdued demand pressures, and manageable inflation expectations, the BSP has scope to preserve monetary policy support to the economy to help strengthen overall demand and shore up market confidence.

The recent inflation hike observed in recent months is expected to be largely transitory, reflecting the impact of weather-related disturbances, as well as higher global oil prices.

TSB