Philippines well-placed vs tightening global financial conditions

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) said the Philippines is well-placed to survive the impact of a possible tightening of global financial conditions as many central banks in advanced and emerging economies start their policy normalization process.

BSP Governor Benjamin Diokno said many central banks have started reassessing their respective monetary policy settings in view of surging prices owing to strong demand and persistent supply constraints.

“The BSP, however, is confident that the Philippines is well-placed to recover with a possible tightening of global financial conditions. We continue to have a full range of policy tools at our disposal,” he said.

The country’s hefty gross international reserves (GIR) level that stood at $107.16 billion in end-September has allowed the central bank to actively participate in the foreign exchange market to temper volatility.

Furthermore, Diokno said the BSP has macroprudential measures to target specific imbalances and prevent buildup of risks in the financial system.

“In sum, the policy actions of the BSP during the third quarter are consistent with its commitment to maintaining macroeconomic stability. We will continue our data-driven approach in achieving BSP’s primary mandate of promoting price and financial stability conducive to a balanced and sustainable growth of the economy,” he said.

Despite rising inflationary pressures, the BSP has kept interest rates at record lows as it vowed to do whatever it takes to help the country fully recover from the impact of the COVID-19 pandemic.

“In response to the manageable inflation environment, the BSP maintained its accommodative monetary policy settings during the third quarter of 2021 mainly to sustain the economy’s nascent recovery,” Diokno added.

Inflation averaged 4.5 percent from January to September this year, exceeding the central bank’s two to four percent target, as supply constraints and weather-related disturbances pushed food prices higher.

Likewise, prices of raw materials and energy commodities also increased in recent months as global supply chain bottlenecks disrupted production, and a broad recovery in global demand led to inventory drawdowns.

Diokno said the reintroduction of strict quarantine protocols in August with the resurgence of COVID-19 due to the emergence of the more contagious Delta variant tempered private demand and forced businesses to limit their operations anew.

“Against this backdrop, continued monetary policy support remains crucial in supporting private demand and encouraging banks to lend and thereby allow the economic recovery to gain more traction. At the same time, further traction from non-monetary government interventions to directly address supply-side inflation pressure also provides flexibility to monetary authorities in preserving policy support for the economy,” he said.

According to Diokno, the continued decline in COVID-19 infections owing to the speedier vaccine rollout and more effective granular lockdowns would help underpin the economy’s gradual reopening,

Based on its assessment last month, the Monetary Board sees inflation accelerating to 4.4 percent this year before easing to 3.3 percent next year and to 3.2 percent in 2023.