BSP to carefully assess timing of unwinding its easing measures

THE central bank will carefully gauge the appropriate timing of unwinding its aggressive policy measures, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said.

“With the huge amount of liquidity injected into the system, we are fully aware of the need to carefully assess the appropriate timing of the unwinding of all these measures,” Mr. Diokno said in a credit rating call with Moody’s Investors Service held on Oct. 14.

“Doing it too late or too early may have serious repercussions on the economy,” he added.

This year, the central bank slashed benchmark rates by 175 basis points (bps) to aid the economy amid the coronavirus disease 2019 (COVID-19) pandemic. This has reduced the reverse repurchase, lending, and deposit facilities to record lows of 2.25%, 2.75% and 1.75%, respectively.

Reserve requirements for big banks were also trimmed by 200 bps while those for smaller banks were reduced by 100 bps.

The central bank’s policy moves have already provided liquidity support worth P1.9 trillion or equivalent to 9.6% of the country’s gross domestic product, Mr. Diokno said.

The liquidity support from the central bank is manifested in the increase of corporate bank issuances, BSP Deputy Governor Francisco G. Dakila, Jr. said in an online forum on Tuesday. 

This liquidity injection provided a boost to corporate bond issuances.

“With the low interest rate environment, bond issuances increased for the period of January to August,” Mr. Dakila said.

He noted corporate bond issuances increased by 67% to P540.9 billion in the first eight months of the year from P323.9 billion in the same period of 2019.

Data from the Philippine Dealing and Exchange Corp. showed bonds issued by private companies surged 126% to P1.48 trillion as of August from its levels in 2016.

“We see now that the impact of the liquidity injection, the impact of the lower demand for bank lending has been mitigated by higher levels of bond issuances,” Mr. Dakila said.

Bank lending in August rose by 4.6% in August, easing from the 6.7% pace in July and the slowest since the 4.4% growth seen in November 2006.

The BSP’s participation in the bond market has calmed market fears amid uncertainty due to the pandemic, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said.

“BSP is one of the main reasons the bond market remains stable and orderly as it remains open to purchase bonds on a daily basis, capping any possible rise in bond yields to curtail panic,” Mr. Mapa said in an e-mail, noting the BSP holds roughly around 20% of total bonds outstanding.

Given the BSP is holding a substantial amount in the bond market through unconventional policies it has employed amid the crisis, adverse repercussions may arise once this support is removed, he said.

“Timing and proper communication will be crucial as BSP carefully navigates removing the training wheels so that the market will not panic as it transitions back to operations sans any central bank support,” Mr. Mapa said.

To recall, the BSP in March bought P300 billion worth of securities from the Bureau of the Treasury in a bid to support the government’s pandemic response. This was followed by another P540 billion in direct provisional advances to the National government via a loan earlier this Month.

Aside from this, the BSP has also purchased government securities in the secondary market. — Luz Wendy T. Noble