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The central bank will carefully assess the right time to undo its aggressive policy measures, said Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.
“With the enormous amount of liquidity injected into the system, we are fully aware of the need to carefully assess the right timing for the reversal of all these measures,” Diokno said in a credit rating call with Moody’s Investors Service on October 14.
“Doing it too late or too early can have serious repercussions on the economy,” he added.
This year, the central bank cut benchmark rates by 175 basis points (bp) to help the economy amid the 2019 coronavirus disease (COVID-19) pandemic. This has reduced reverse repurchase, loan and deposit facilities to historical lows of 2.25%, 2.75% and 1.75%, respectively.
Reserve requirements for large banks were also reduced by 200 bps, while those for smaller banks were reduced by 100 bps.
The central bank’s policy measures have already provided liquidity support worth $ 1.9 trillion or equivalent to 9.6% of the country’s gross domestic product, Diokno said.
The central bank’s liquidity support is manifested in rising corporate bank issuance, BSP Deputy Governor Francisco G. Dakila, Jr. said Tuesday in an online forum.
This injection of liquidity gave a boost to corporate bond issues.
“With the low interest rate environment, bond issues increased during the January-August period,” said Dakila.
He noted that corporate bond issuances increased 67% to P540.9 billion in the first eight months of the year from P323.9 billion in the same period of 2019.
Data from Philippine Dealing and Exchange Corp. showed that bonds issued by private companies rose 126% to P1.48 trillion in August from their levels in 2016.
“We now see that the impact of the injection of liquidity, the impact of the lower demand for bank loans, has been mitigated by higher levels of bond issuance,” said Dakila.
Bank loans in August increased 4.6% in August, declining from the 6.7% pace in July and the slowest since the 4.4% growth observed in November 2006.
BSP’s participation in the bond market has calmed market fears amid uncertainty due to the pandemic, said ING Bank NV Manila senior economist Nicholas Antonio T. Mapa.
“BSP is one of the main reasons the bond market remains stable and orderly, as it remains open to bond purchases on a daily basis, limiting any potential increase in bond yields to reduce panic,” he said Map in an email, noting the BSP owns roughly around 20% of total outstanding bonds.
Since the BSP keeps a substantial amount in the bond market through unconventional policies that it has employed amid the crisis, adverse repercussions may arise once this support is removed, he said.
“Timing and proper communication will be crucial as BSP navigates carefully removing the training wheels so the market does not panic as it returns to trading without central bank support,” said Mapa.
To recall, the BSP bought P300 billion in Treasury securities in March in an attempt to support the government’s response to the pandemic. This was followed by another P540 billion in direct interim advances to the national government through a loan earlier this month.
Apart from this, the BSP has also bought government securities on the secondary market. – Luz Wendy T. Noble
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