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Home Spotlight BSP 29th Anniversary Special Issue: Building the Nation's Road to Recovery

Price stability for a stronger PH economy

Manila StandardbyManila Standard
July 4, 2022, 12:20 am
in BSP 29th Anniversary Special Issue: Building the Nation's Road to Recovery, Spotlight
Reading Time: 5 mins read
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Based on its charter, the main responsibility of the Bangko Sentral ng Pilipinas (BSP) is to formulate and implement policies in the areas of money, banking, and credit, with the primary objective of preserving price stability.

“Price stability” refers to a condition of low and stable inflation. By keeping prices stable, the BSP helps ensure strong and sustainable economic growth and better living standards. 
Adjustments of the Key Policy Interest Rate

The BSP’s key policy interest rate—which influences the interest rates imposed by banks—was at its peak of 4.75 percent in early 2019. Following the assumption of Benjamin E. Diokno as central bank governor, the BSP implemented a series of rate cuts that brought down its key policy rate to just 4.0 percent by the end of the year.

The rate cuts were done based on the BSP’s assessment of a benign inflation environment. 

After peaking at 6.7 percent in September 2018, inflation had dropped to a three-year low of 0.8 percent in October 2019.

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When the inflation outlook is benign, the BSP has the flexibility to cut its key policy rate in support of economic growth. Low interest rates encourage credit-taking activities, such as to fund investments and infrastructure projects, which then help spur economic growth.

Meantime, upon the onset of the COVID-19 crisis in early 2020, the BSP continued with the series of rate cuts to support economic recovery and growth.

It had brought down its key policy rate to a record low of 2.0 percent in November 2020.

The low interest rate environment helped encourage credit activities, which were important in reversing the pandemic-driven recession.

Aided in part by low interest rates and the other policy responses of the BSP and the National Government, the economy bounced back from the crisis. Following the recession in 2020, the Philippine economy grew by 5.7 percent in 2021 and further by 8.3 percent in the first quarter of 2022.

The record-low rate was in effect until the Philippine economy’s solid recovery, which prompted the BSP to start normalizing the policy rate. On 19 May 2022, the BSP raised the key policy rate by 25 basis points, followed by another 25 basis points on 23 June 2022. These adjustments brought the current policy rate to 2.5 percent.

The rate hikes were also implemented amid an outlook of elevated inflation. The Russia-Ukraine war has led to a rise in global prices of oil and other commodities, and this is seen causing second-round effects to domestic prices, including wage hikes.

When the inflation outlook is elevated, the BSP may hike its key policy interest rate. Higher interest rates temper demand for loans, thereby easing demand for goods and services and slowing down inflation.

Based on inflation forecast of the BSP as of 23 June 2022, inflation will average at 5.0 percent in 2022, 4.2 percent in 2023, and back to within-target of 3.3 percent in 2024.

The higher-than-target inflation projections for 2022 and 2023 are due mainly from external supply shocks, such as rising global prices amid the Russia-Ukraine war.

With its timely adjustments of the key policy rate, the BSP remains committed to its price stability mandate, while supporting growth of the economy.

Looking ahead, the BSP affirms its support for the economy while keeping an eye on the potential risks to future inflation. The BSP stands ready to respond to potential second-round effects, in line with its price and financial stability objectives. 

Monetary Operations

Besides interest rate adjustments, the BSP also fulfills its price stability mandate through its monetary operations.

When the inflation outlook is elevated, the BSP may accept more deposits from banks or sell more debt securities to absorb excess liquidity in the financial system. By doing so, it helps temper demand for goods and services and helps slow down inflation.

The BSP made sure to capitalize on its recently regained authority to issue its own debt securities to pursue its price stability mandate. Republic Act No. 11211, the amended charter of the BSP that was signed into law in February 2019, brought back its authority to trade its own securities.

As of 26 April 2022, total outstanding amount absorbed by the BSP via its facilities stood at about ₱1.6 trillion, almost double the ₱854 billion recorded before the pandemic in December 2019.

The bulk of the BSP’s monetary operations to absorb excess liquidity had been conducted through its term deposit facility (TDF), which accounts for 36 percent of total (or about ₱576.8 billion). 

Placements in the BSP Securities facility, overnight reverse repurchase facility, and overnight deposit facility made up about 31.8 percent (₱509.6 billion), 19 percent (₱305.0 billion), and 13.2 percent (₱211.9 billion), respectively, of the total amount of liquidity absorbed by the BSP.

Moreover, effective 10 December 2021, the BSP has allowed trust entities to participate in the secondary market for BSP Securities. The move is in line with the BSP’s efforts to strengthen the effectiveness of its market-based instruments for monetary operations. 

In addition, the BSP has included digital banks as eligible participants in its monetary operations effective the same date. A part of its digital banking framework, the measure aims to further improve the transmission of monetary policy.
All these initiatives and reform measures reflect the BSP’s strict commitment to price stability.

The BSP recognizes the importance of price stability in achieving a better economy for all Filipinos, in that it helps provide an enabling environment for businesses and helps maintain the purchasing power of households.

The BSPs’ commitment to price stability is consistent with its agenda of bringing the central bank closer to the Filipino people.

Tags: Bangko Sentral ng PilipinasEconomyPrice stability
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