BANGKO Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the timing of their monetary policy support unwinding or, as he dubbed it—the BSP’s “pandexit”—remains “very much uncertain” at this time.
In a dialogue with reporters on Thursday, the BSP governor said while they have already broadly outlined their exit strategy, the monetary authority’s subsequent moves will largely depend on economic outcomes and not anchored on calendar dates.
“We would also like to emphasize that the timing of the exit remains very much uncertain at this time. The threat of further Covid-19 infections continues to pose a downside risk to both growth and inflation in the coming months,” Diokno said.
“Therefore, we deem it prudent to leave some room for flexibility in policy-making to account for uncertainty and risk, especially as the situation remains very fluid,” he added.
Record low rates
In 2020, the BSP cut its main policy rates to record lows to provide massive support to the
Philippines’ ailing economy due to the disruptions caused by the pandemic. In 2021, the BSP maintained this record low rate all throughout the year.
The governor said the timing and conditions under which the BSP will start unwinding its pandemic-induced interventions will be guided by the inflation and growth outlook.
“In deciding to scale back BSP liquidity-enhancing measures, the challenge for the BSP is in striking a delicate balance between providing adequate stimulus to the economy and preventing the buildup of inflationary pressures and risks to financial stability,” Diokno said.
BSP’s exit strategy
With the expected improvement in the National Government’s (NG) finances amid the recent upturn in economic activity, the BSP said it can ”look to gradually unwind” direct funding support to the NG.
“We reiterate that the provisional advances have always been intended to be a temporary intervention,” the governor said.
“As an encouraging sign of improving public finances, the National Government requested for only P300 billion in provisional advances this January, lower than the previous advance of P540 billion,” Diokno added.
Overall, the governor laid out four components of the BSP’s “pandexit.”
The first component involves the recalibration of the BSP’s monetary operations to help ensure that the accommodative monetary policy stance is transmitted to the economy through short-term interest rates.
Another component involves the unwinding of the measures that infused liquidity directly into the economy, such as provisional advances to the government and alternative compliance with reserve requirements.
The third component entails the reduction in monetary accommodation, or the eventual raising of the policy interest rate when prospects for the economy have materially improved.
Lastly, their exit strategy involves building on the country’s buffers to ensure that the economy is prepared in for another crisis.
“Even as the BSP looks toward unwinding these measures, the BSP will also keep a steady hand on its policy levers until there is firm evidence, supported by our rigorous analysis of trends and data, that the recovery has gained sufficient traction,” Diokno said.