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BSP Pauses Monetary Easing to Give PH Room to Digest P1.3T in Liquidity

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Key Points

  • The central bank kept its key interest rates unchanged on Thursday saying the Philippine economy needed time to absorb the P1.3 trillion of liquidity it has already poured into the financial system.
  • Diokno described the balance of risks to the inflation expectation as “leaning toward the downside from 2020 until 2022”, owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic.
  • The group of seven members also noted the sharp contraction in domestic production in the first half of 2020, indicating the impact of implementing the required measures to contain virus spread in the region.
  • Visit The Financial Today’s homepage for more stories.

The central bank kept its key interest rates unchanged on Thursday—in line with market expectations—saying the Philippine economy needed time to absorb the P1.3 trillion of liquidity it has already poured into the financial system since the coronavirus pandemic started.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the regulator agreed to retain the interest rate on its overnight reverse repurchase facility at 2.25%, while interest rates on overnight deposits and lending facilities were also held at 1.75% and 2.75%.

“The Monetary Board’s decision was based on its assessment that the inflation environment remains benign,” he said at an online press briefing.

“While the latest baseline forecasts have risen slightly due to the higher-than-expected inflation in July and recent increases in global crude oil prices, the future inflation path remains firmly within the government’s 2-4 percent target,” he added.

Diokno described the balance of risks to the inflation expectation as “leaning toward the downside from 2020 until 2022”, owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic.

“Meanwhile, inflation expectations remain broadly consistent with the inflation target,” he assured.

The Monetary Board noted during its Thursday meeting that the outlook for global economic growth remained subdued and uncertain in the face of an uptick in COVID-19 cases.

The group of seven members also noted the sharp contraction in domestic production in the first half of 2020, indicating the impact of implementing the required measures to contain virus spread in the region.

At the same time, Diokno said the Monetary Board “observed early signs of recovery in domestic economic activity with the gradual easing of lockdown restrictions, supported by ample liquidity in the financial system.”

“Given these considerations, the Monetary Board is of the view that monetary policy settings remain appropriate for the time being,” the central bank chief said.

He added that “a prudent pause” will allow the BSP’s cumulative 175-base-point policy rate reduction as well as other monetary and regulatory relief measures to work their way through the economy in full, even as the national government continues to implement interventions to boost economic activity and protect human lives and livelihoods.

“Going forward, the BSP remains committed to deploying its full range of instruments as needed in fulfillment of its mandate to promote non-inflationary and sustainable growth over the medium term,” he said.

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