Given a manageable inflation trajectory, the Bangko Sentral ng Pilipinas (BSP) did not change its key rates for the whole of 2021 and remained at an interest rate of 2%, the most low in the history of the central bank’s key rate.
For 2022, the BSP should maintain its accommodative policy at least for the next or two quarters.
For the BSP, maintaining a low interest rate environment will ensure that the economy does not collapse and find a fulcrum to recover from the pandemic-recession. After five quarters of contractions, the economy rebounded in the second quarter of 2021.
For the first three quarters of 2021, GDP recovered by 4.9%, which corresponds to the government’s target of 4 to 5%.
The sustained policy of the BSP was accompanied by its liquidity easing measures. It has infused up to 2.3 trillion pesos of fresh money supply into the financial system, or 13% of GDP, mainly for market confidence.
“The BSP will remain vigilant on the current inflation dynamics to ensure that the stance of monetary policy continues to support the economic recovery to the extent that the inflation outlook allows,” said the governor of the BSP , Benjamin E. Diokno. “(BSP) will carefully analyze the operating environment with a forward-looking perspective to act preventively to address any risk to our price stability mandate,” he said.
BSP GDP assumptions for 2021, 2022
BSP Deputy Governor Francisco G. Dakila Jr. said at a recent monetary policy briefing that with higher than expected GDP growth in the third quarter of 2021, the Philippines is “in good shape. on track to achieve the DBCC (Development Budget Coordination Committee) growth target revised from 5% to 5.5% in 2021.
“This is supported by major economic indicators which point to continued expansion in the coming months,” Dakila said. He noted that the Composite Purchasing Managers Index released by the Philippine Institute of Supply Management rose in October and “surpassed the 50 point expansion threshold amid easing restrictions on business. economic”.
“There is also a continuous improvement in capacity utilization, with the average capacity utilization rate in the manufacturing sector increasing to 67% in October 2021 from the level a month ago based on the Philippine Statistics Authority (PSA) integrated monthly survey of selected industries. Dakila explained.
“In addition, mobility indicators have trended upward in recent months following the nationwide deployment of the alert levels system by the National Government (NG),” he added. Mobility increased again from the first week of December due to seasonal factors linked to the Christmas holidays.
For 2022, DBCC’s GDP target is seven to nine percent growth, and for 2023-2024, about six to seven percent. Preventive public health measures such as testing and contact tracing remain crucial in helping the government meet the goal of completely lifting quarantine measures by 2022, Dakila said.
The BSP official said the central bank “will maintain its position of maintaining an accommodating policy environment to ensure the sustainability of this recovery and to support NG efforts to accelerate vaccine deployment across the country.”
“The continued support of fiscal policy also remains crucial to support the expansion of economic activity as well as the prevention of permanent scar effects on the economy,” said Dakila.
He said that alongside efforts to further strengthen the health system and reduce the number of cases, the recovery of the economy should be supported by the “Build, Build, Build” program and the implementation of Corporate Recovery. and Tax Incentives for Enterprises or CREATE. as well as the Financial Institutions Strategic Transfer or FIST Act, which is supposed to keep the financial sector stable amid the COVID-19 pandemic.
BSP will be “patient”
Lax monetary policy means expansion of money and credit, as well as fiscal stimulus and low interest rates.
At the last BSP policy meeting for 2021, Diokno said the Monetary Board still sees “sufficient leeway to keep a patient hand on the BSP’s policy levers due to a manageable inflation environment.”
Diokno said GDP growth could return to pre-COVID levels by the first quarter of 2023 and this will depend on how quickly economic sectors open up and the vaccination program. But, if the changing inflation and growth outlook allows, he also said that BSP will try to maintain an accommodative monetary policy to help boost domestic demand and support market confidence.
The BSP has always said it has sufficient monetary leeway to remain accommodative or expansionary in terms of policy stance in order to stimulate private consumption and investment. With this forecast, it’s no surprise to market watchers that since November 2020, the benchmark rate has not been affected.
Despite high inflation due to transient factors, inflation is expected to slow to the midpoint of the target of two to four percent in 2022 and 2023. On December 16, the Monetary Council revised inflation forecasts for 2021 at 4.4 percent from its previous estimate. of 4.3% announced on November 18. For 2022, the BSP forecasts an inflation of 3.4%, also higher than the forecast of November 18 of 3.3%. However, there has been no change in the baseline forecast for 2023 which remains at 3.2%.
Risks to the inflation outlook are even more on the upside for 2022 while remaining broadly balanced for 2023. Upside risks are the supply of key food commodities and demands for higher transport tariffs and strong demand. global demand amid persistent supply chain bottlenecks.
The Monetary Board also said that new COVID-19 variants such as the Omicron could also present downside risks.
Don’t move with the actions of the Fed
The BSP has always been motivated by national considerations and, more importantly, by the outlook for inflation and growth.
Dakila said the Monetary Council’s latest move to keep rates stable had already taken into consideration the hawkish stance of the US Federal Reserve, especially in the inflation path projections.
“We haven’t had to follow Fed actions in the past (and) any volatility in the financial market, including capital flows, will be managed by our strong external position,” Dakila said.
BSP’s first line of defense is its market-oriented exchange rate system.
Diokno and Dakila both stressed that the Philippines remains in a favorable position to resist tightening global financial conditions as inflation, although currently above target, is still under control as external cushions continue to grow. ‘be sufficient at 108 billion dollars at the end of November. 2021.
“The BSP continues to maintain a flexible exchange rate as the first line of defense against global volatilities. In the event of a significant tightening in dollar liquidity, the BSP can also use its dollar liquidity enhancement measures such as the US dollar redemption facility and the exporters’ dollar and yen rediscount facility, ”he said. said Dakila. Over the past several months, the peso has held steady at P49-50: $ 1.
With all these factors, Dakila once again stressed that the BSP does not have to recalibrate its policy according to the political decisions of the central banks of the big economies. “Nonetheless, we are also aware that faster than expected cuts in Fed asset purchases could lead to financial market volatility and affect capital flows,” he said.
External factors, including the US Federal Reserve’s asset purchase reduction plans, are part of the BSP’s considerations in assessing the stance of monetary policy, as these factors could affect the trajectory future inflation and economic growth, said Dakila.
“At this point, the BSP continues to support the national economic recovery until the process is fully sustainable, but stands ready to respond to potential fallout from external developments and second-round effects that may arise from factors on the side. of the offer, ”he said.
He added that “monetary policy will continue to ensure that the expansion of money and credit, as well as low interest rates, will not affect the objectives of inflation and financial stability.”
“If national conditions warrant a recalibration of monetary policy parameters, the BSP is ready to use the full range of its policy instruments to address any emerging threats to the BSP’s price stability and financial mandates,” he said. he reiterated.
As far as BSP is concerned, the economic recovery on the demand side is still ‘robust’, but the economy ‘is likely to operate below full capacity in the near term’, implying demand-driven price pressures. . The expected recovery in external demand will also support the recovery.
On the supply side, the BSP continues to expect global prices for commodities such as oil and food to moderate in the medium term after the sharp increases in 2021. But the central bank has also noted that “protracted dislocations” in global supply chains could continue to increase inflation in the near term.
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