Bangko Sentral ng Pilipinas mulls gradual monetary easing

MANILA, Philippines - After releasing half a trillion pesos worth of liquidity into the system, the Bangko Sentral ng Pilipinas (BSP) said it would continue to look for opportunities for monetary easing, albeit in a “measured pace.”

The market has been anticipating an end of the central bank’s cycle of monetary easing but Tetangco’s statement over the weekend indicated that interest rates could still go down closer to the historic low of 4.125 percent.

Tetangco estimated that since the Bangko Sentral ng Pilipinas (BSP) started easing last year, about P500 billion have been released into the economy in the hope of spurring economic activities that would support growth.

This is an unusually large amount but Tetangco said this much liquidity might not need to be sterilized if used for productive purposes.

The BSP has been talking about the need to eventually think of unwinding its monetary tools currently calibrated in favour of supporting growth instead of containing inflation which had been on a downturn anyway.

But when asked whether this much liquidity would have to be sterilized eventually, Tetangco said this was not necessarily so.

According to Tetangco, the point of releasing funds into the system was to allow production to continue by making cheap money available to productive sectors.

“For as long as the funds that are available in the system are utilized, it will not be inflationary,” Tetangco said. “What you want to mop up is the excess, if there is any.”

On the other hand, Tetangco said even excess liquidity meant that inflation would go up. “Remember, over the last two decades, there’s been a weakening in the relationship between liquidity and inflation,” he said.

Tetangco explained that the BSP’s overall monetary policy stance would be prudent but this did not mean the cycle of monetary easing is over. “We would still look for opportunities to ease but now at a measured pace,” Tetangco said.

“When I said prudent I meant overall monetary policy,” Tetangco said. “My point is that the BSP has already taken a number of steps since last year. And these steps have resulted in the availability of ample liquidity in the system which is now a critical advantage in our financial markets.”

As a result of monetary easing, Tetangco said the country has successfully avoided the kind of credit crunch that has caused economies to stall in Europe and the US.

“The challenge of course is to provide the means and the venue for such liquidity to flow from those who have more to those who need it, at a fair price and under defined market conventions,” Tetangco said. “Meaning, the liquidity is there, use it.”

Tetangco said banks would have to play a leading role in making this happen. “Monetary policy has created the environment, banks will have to respond to the needs of the public by lending more,” he said.

The BSP’s rate reduction has brought down the key policy rate to 4.75 percent, just 62.5-basis points away from the lowest recorded level of 4.125 percent in May 1992.

Aside from the funds released into the system by other non-rate measures, Tetangco said the actual rate reduction should bring down the cost of money, making it more affordable for both corporate and individual borrowers to secure loans.

“What I am saying is that as far the monetary condition is concerned, there is enough liquidity, there is a reduction in the cost of money with the declining interest rates so industries should use it,” Tetangco added.