BSP can keep rates at record lows but PH recovery needs fiscal boost—Diokno

MANILA, Philippines—The central bank can keep domestic interest rates at their prevailing record-low levels longer to help the Philippine economy regain its footing despite stubbornly high inflation, the head of the agency said on Thursday (Sept. 2).

At an online briefing, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the regulator continues to have ample monetary policy space and believes that the current accommodative policy settings represent appropriate stimulus to demand.

The BSP chief said the accommodative policy settings should be allowed to continue to work their way through the economy to bolster private consumption and investment.

“The BSP’s monetary policy remains oriented towards supporting ongoing economic recovery amid supply-side pressures and the presence of economic slack as well as the downside risks to domestic demand from the impact of the protracted COVID-19 pandemic,” he said.

Despite this, he noted that heightened risk aversion amid risks to corporate and household balance sheets continues to dampen lending activity.

On Wednesday (Sept. 1), the BSP released data showing that bank lending in July contracted for the eighth consecutive month, despite growing liquidity in the local financial system, as both borrowers and lenders continue to shy away from new debt due to pandemic-related economic worries.

According to Diokno, although business and consumer sentiment have gradually improved, domestic demand continues to be tempered by the uncertainty surrounding the pandemic, especially amid the emergence of the Delta variant and the progress of the vaccination rollout in the country.

Because of this, the central bank chief reiterated his stand that fiscal support remains critical to sustain economic momentum and prevent long-term scarring.

Continued implementation of targeted fiscal initiatives coupled with efforts to ramp up the vaccination program should help boost market confidence and drive the economic rebound, especially after the restrictions are lifted, he said.

In addition, while the BSP continues to prioritize the use of monetary policy space to providing support to economic activity amid the pandemic, the agency chief said it also remains vigilant and stands ready to respond against emerging risks to its price and financial stability objectives.

“Going forward, the BSP will continue to ensure that the expansion of money and credit, along with fiscal stimulus and low interest rates, will not lead to excessive inflation and trigger financial stability risks,” Diokno said.

“When domestic developments warrant a recalibration or withdrawal of policy support, the BSP will properly establish a smooth normalization of its time- and state-bound measures,” he added.

TSB