BSP: No interest rate hikes yet as PH economy recovers
MANILA, Philippines—The Philippine central bank intends to keep domestic interest rates at “rock bottom” levels for some time despite growing talk about an upcoming increase in the cost of money in developed economies that are starting to emerge from the COVID-19 pandemic.
At an online briefing, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the prevailing accommodative monetary policy and liquidity-enhancing measures of the regulator will continue to support the domestic economic crisis by fostering favorable credit conditions and the orderly functioning of the government securities market.
“With a manageable inflation outlook, the BSP continues to prioritize the use of monetary policy space to provide support to economic activity amid the pandemic as key sectors transition to the post-pandemic phase,” he said.
To date, the BSP’s liquidity-easing measures have released up to P2.2 trillion — equivalent to 12.1 percent of the country’s gross domestic product — into the financial system.
These measures included the 200-basis point cumulative reduction in policy rate in 2020 as well as reductions in reserve requirement ratios, purchases of government securities in the secondary market and provisional advances to the national government.
The BSP chief said that, with ample liquidity in the financial system, domestic interest rates have gradually declined over the past several months, even as lending activity remained affected by banks’ risk aversion due to concerns over asset quality, profitability, and the broader economic outlook.
The prevailing stance of monetary policy remains anchored on the BSP’s assessment of a manageable outlook for inflation over the next two years, he said, explaining that this outlook in turn is based on the continued predominant role of transitory supply-side factors in the inflation uptick in recent months.
In addition, the extent of unused economic capacity amid the early stages of demand recovery partly mitigates the risk of near-term demand-driven pressures as well as second round-effects from supply-side inflation pressures.
With asset prices keeping in line with overall market fundamentals, Diokno said the BSP remains on the lookout for signs of imbalances amid a low-interest rate environment and in anticipation of further demand recovery.
“Looking ahead, the BSP shall remain vigilant to ensure that policy responses will neither lead to excessive inflation nor trigger financial stability risks, especially as economic recovery gets underway,” he said.
Diokno said he was aware of speculation that the US Federal Reserve was getting ready to raise interest rates, which would result in a ripple effect around the world, including a reversal of dollar flows from countries like the Philippines.
He said, however, that the country’s fundamentals are strong enough to withstand such a policy shift if it happens.
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