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Focuses on non-inflationary growth
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno is ensuring a smooth normalization process as the Philippines shifts to the pandemic-induced ‘New Economy’, balancing money and credit growth, fiscal stimulus and low interest rates in a non-inflationary package.
“The health crisis has required central banks to be nimble,” Diokno said, particularly since the COVID-19 pandemic “had a strong and rapid influence on national and global demand.”
“Falling inflation in other countries led to greater pressure for central banks to adopt more measures, including unconventional ones, to stimulate their respective economies (and the) crisis has also taught us that there are limits to what policy monetary and unconventional measures of the central bank I can do, “said Diokno. “When interest rates are low and private demand is weak, as is the case during this pandemic, the transmission of financing conditions to private spending could be limited.”
The BSP is up to the task, it is one of the first central banks in the region to cut policy rates to a cumulative 200 basis points (bps) as of November 19, injecting P1.9 trillion of fresh liquidity into the financial system to supported an economy in recession and launched several anti-pandemic packages in support of banks, businesses and households.
For the BSP, Diokno said that the pandemic has made it clear that the expected impact of the policy rate cuts and also the reduction of reserve requirements on market rates and bank financing costs could “take time. more to materialize. “
Still, targeting inflation, even in the midst of the pandemic, is the BSP’s primary mandate to ensure inflation remains manageable. If done correctly, growth and jobs will be sustainable. Ensuring low and stable prices will help facilitate economic recovery and job opportunities, Diokno said.
“This is critical during this pandemic, when changes in economic conditions tend to be abrupt and unpredictable, and they tend to have persistent effects,” he added.
Diokno said that the BSP remains focused on price stability, but at the same time, it also remains aware of the risks that will undermine financial stability than the expansion of money and credit, low interest rates with the benchmark index now at a record two percent “they will not lead to excessive inflation or result in increased financial stability risks.”
“When internal events warrant a recalibration of policy support, the BSP will aim for a smooth normalization of its time-bound measures. This is consistent with the BSP’s data-driven approach to the conduct of monetary policy, ”Diokno said.
The BSP has the flexibility and monetary space to support the economy, but emphasizes that medical and macroeconomic interventions must go hand in hand to protect the public welfare and instill confidence in the market.
BSP Deputy Governor Francisco G. Dakila Jr., for his part, said that for some time, since the virus outbreak, BSP’s political stance has been accommodative. “We expect it to remain (accommodative) in the coming months” or until the economy recovers from the impact of the pandemic.
Dakila said they are monitoring possible downside risks to economic activities that have increased, such as those stemming from the resurgence of COVID-19 cases around the world. This continues to fuel uncertainty and reduce market sentiment, he said.
The recent 25 basis point BSP cut to the policy rate should “help shore up market sentiment as we prepare (for when) downside risks materialize,” Dakila said.
Much uncertainty still prevails in the markets due to the pandemic, and how soon economic activity is resolved or resumes will depend on the development of the COVID-19 vaccine and the strengthening of the public health system, Dakila said.
Deciding to cut interest rates again last week, Dakila said the BSP was looking for an improved GDP result in the third quarter of -11.5 percent compared to -16.9 percent in the second quarter, and “is projected that this will continue into the fourth quarter, “he said. said. “We are still anticipating that the economy will contract in the fourth quarter, but (at a) more moderate rate.”
Inflation averages 2.5 percent so far this year, still within the government’s 2020 target of 1.75 percent to 2.75 percent, and two to four percent for 2021 and 2022. GDP is expected to recovers to 6.5 percent to 7.5 percent in 2021 and 2022.
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