Limited impact seen in fresh monetary moves

THE weakness in business and consumer confidence in the face of the pandemic is limiting the potency of monetary policy as a tool to lift the economy from recession, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said on Thursday.

In a virtual press briefing, the Central Bank governor said monetary policy moves may “take a while” to materialize and, thus, called for a “whole of government” approach to lift the economy out of contraction.

“The Covid-19 pandemic showed that the expected impact of policy rate adjustments and recent, and triple R cuts [reserve requirement ratio], may take a longer time to materialize due to bank risk aversion and weak private sector demand, largely because the length and intensity of the lockdown dampened the impact of the BSP measures and credit and private spending,” Diokno said.

“Hence, any further monetary measures may continue to have a limited impact unless business and consumer confidence improves significantly. These limits to monetary policy underscore the need for a whole of government approach to address the impact of the pandemic,” he added.

In 2020, the BSP aggressively cut its interest rates to spur activity in the local economy. In total, it has already cut its rates by 200 basis points to push its overnight reverse repurchase rate at an all-time low of 2 percent.

Just last week,  however, the BSP decided to keep all monetary policy levers untouched, alongside their inflation forecast revision to 4 percent on average for 2021.

“In this regard, fiscal policy, together with structural reforms, must continue to share in the heavy lifting to quicken the economic recovery by improving sentiment and demand,” Diokno said.

The BSP had also reported that despite their stimulus, the local bank lending rate entered negative territory at 2020’s close, registering the system’s first decline in 14 years.

The governor, however, projected bank lending to pick up in the coming months once the economy starts to recover.

“We know that credit demand has remained weak despite substantial monetary easing. And this is due to persistent bank risk aversion. Looking ahead, the BSP expects borrowing and lending activity to pick up in the coming months, as the economy recovers with continuing monetary and fiscal policy supporting progressive lifting of lockdown measures and mass inoculation against Covid-19,” Diokno said.

Several analysts have forecast a muted monetary policy direction from the BSP for the entire 2021.

Earlier this week, ING Bank economist Nicholas Mapa said the Central Bank will likely keep both the main monetary policy rate and the reserve requirement ratio (RRR) of banks on hold for the entire year.

Image credits: Nonoy Lacza

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