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Sunday, May 19, 2024

Monetary policy must continue to support recovery

"Has the time come for the BSP to consider reversing course and shifting to a policy of gradual tightening?"

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To discharge its function in an exemplary manner, a central bank must be able to do two things well. One is to identify and describe a threat to the stability of the nation’s financial system. The other is to know the appropriate time to effect a change in policy direction.

Identifying and describing a threat to the nation’s financial stability is usually the less difficult of the two duties. Though some are more serious than others, threats to a nation’s financial stability are generally easy to spot. The COVID-19 pandemic is a perfect example: On the basis of the health-related happenings in other countries and the clinical literature and media reports about it, COVID-19 posed a very serious threat to the Philippine economy. BSP (Bangko Sentral ng Pilipinas) made that determination and, to its credit, lost no time deploying all its policy threats in order to minimize the damage to the economy.

The principal tool deployed by BSP was the most obvious: Its interest rate policy. The nation’s monetary authority brought its basic interest rate to the lowest level in its history—2 percent. But lowering the cost of money would not work if there was insufficient liquidity in the banking system, and so BSP enacted a number of measures intended to ensure that the banks have plenty of cash to lend to business enterprises willing to brave the pandemic. Chief among these were the progressive reduction of the RRR (required reserve ratio) of banks, which freed billions of bank deposits with the BSP, and the reclassification of certain bank balance-sheet items so as to expand the banks’ lending capacity.

BSP’s accommodative policy was an appropriate response to the 2020 recession—the worst is this country’s post-World War II history. The policy worked very well, and the nation’s monetary environment became exceedingly benign. But, like horses that will not drink even if they are already at the water’s edge, many banks recorded little increase or actual declines in their business lending in 2020.

But a central bank does not exist in a vacuum, and changes take place in the environment in which it operates. Lately, elements of one of BSP’s two statutory mandates—maintenance of the stability of the nation’s financial relations with the world—have begun to show signs of negative effects on the Philippine economy. The name of the nascent disruptor is inflation. The progressive economic recovery of China, the U.S. and some other major countries have generated an increased demand for oil, and the members of OPEC (Organization of Petroleum Exporting Countries) and other oil exporters have responded by raising their prices. The impact of rising world oil prices on the Philippine economy’s most vulnerable industries—energy, transportation and manufacturing—need no explanation. Higher operating costs for those industries quickly translate into an upward movement of the CPI (consumer price index) and a depreciation of the peso as a higher oil import bill begins to make its influence felt in the foreign exchange market.

These complications are not serious at this point, but they are, nonetheless, requiring the BSP to take a fresh look at its policy of accommodating the nation’s economic situation. Has the time come for the BSP to consider reversing course and shifting to a policy of gradual tightening, with all the implications of such a policy action on the economy’s recovery prospects?

The answer is a clear No. The economy’s recovery prospects, not exactly ebullient at this point, must come first in BSP’s coming decision making. The economy is still taking baby steps toward recovery. A rising CPI and a depreciating peso are not to be taken lightly, but if it comes to a choice between harming and not harming the economy’s recovery, let it be the latter, unreservedly.

Monetary policy must remain accommodative for now. 


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