MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) signaled on Wednesday a pause on its aggressive easing cycle that saw it pushing P2 trillion in liquidity to the financial system to facilitate economic activity battered by the health crisis.
Rate cuts and fresh reductions in mandated reserves will have to wait since BSP Governor Benjamin Diokno believes money supply is sufficient to bring the economy back to its pre-pandemic size by the first half of 2022. The statement comes less than a month ahead of the first policy meeting for 2021 on February 11.
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“Our policy stance is that we will keep this policy for long until such time that we see economy growing at same pace as before at 6% to 6.5%, with unemployment at 5.5%,” Diokno said in an virtual interview.
In addition, he said: “At the moment, there is ample liquidity so I don’t see any cut to reserve requirements at this time. Maybe things will change once the economy starts recovering.”
Diokno’s statements meant a follow through to the 200 basis point cut each to the benchmark overnight borrowings rate and bank’s reserves is not looming anytime soon. That indicates monetary support to the economy weakened by the pandemic will be limited to just the lagged effects of previous decisions that typically take up to 18 months to materialize.
But Nicholas Antonio Mapa, senior economist at ING Bank in Manila, believes it would not take long until Diokno, and his six colleagues at the Monetary Board, act again by the second quarter. “The economy is in need of a jump start as the engines of growth have been idle for so long,” Mapa said in an email.
“No amount of turning on the key or stepping on the gas will help with the car that was once the fastest in the region in need of a decent push from behind,” he said.
Indeed, it would be a difficult climb back up to 6.5-7.5% growth this year as projected by the government, coming from a contraction of as much as 9.5% in 2020. But Diokno believes recovery started as early as the fourth quarter of last year which should be better than all the previous three quarters. Gross domestic product contracted by 10% as of September.
He said the central bank succeeded in calming down market nerves through its speedy intervention. “I think the general consensus is we’ve done well,” he said.
By lowering rates, BSP hopes to bring down interest rates in loans, which in turn should encourage borrowers to seek bank credit. The idea is this credit will be used to fund investments and other economic activities to boost growth.
Reducing reserves, meanwhile, grants lenders additional funds to lend. Diokno said for every 1 percentage point of cut in reserves, BSP releases additional P100 billion to lenders. That meant that last year, P200 billion was freed up.
For Mapa, BSP has already exhausted its moves. “Rate cuts and liquidity infusions indeed are helpful to generate and provide an environment conducive for an economic rebound but Growth will likely only return if these monetary actions are complemented by real economy spending stimulus,” he said.