THE decision by the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Thursday to maintain its key interest rates and bank reserve requirement ratios was widely expected. It was also a mistake.
For the third meeting in a row, the MB has issued what is starting to sound like a boilerplate statement. On February 12, it said, “The Monetary Board’s decision is based on its assessment that prevailing monetary policy settings remain appropriate,” citing “buoyant private demand, sustained bank lending growth, and upbeat business sentiment” as factors supporting the outlook
On March 26, the MB said, “ . . . the Monetary Board is of the view that current monetary policy settings remain appropriate” as a consequence of “solid private demand, adequate domestic liquidity, and buoyant business sentiment.”
On Thursday, the assessment was “current monetary policy settings remain appropriate given the within-target inflation forecasts and the underlying strength of domestic demand conditions,” because of, you guessed it, “solid private household and capital spending, as well as buoyant business confidence,” with a bit of “ample domestic liquidity” and the ever-present phantom of “planned higher public spending” tossed in for good measure.
A dimmer outlook
For those of you keeping score at home, the overnight borrowing rate (reverse repurchase, or RRP) remains at 4.00 percent, while the overnight lending (repurchase, or RP) is still 6.00 percent. The 2.50 percent interest rate on Special Deposit Accounts (SDAs) was also maintained, as well as the 20 percent reserve requirement ratio (RRR) for banks.
In previous columns, I have written that the BSP ought to lower interest rates to spur economic growth and insulate the economy against external shocks.
I have also written that the economy seems to be in a sort of steady state, and is likely to continue to grow within a tolerable range for the foreseeable future no matter what anyone does about it. I think the latter view may have been a little optimistic; the economy will still grow, but the ‘tolerable range’ may be wider than the 1 to 2 percent recent circumstances suggested.
The clue is the sharp decline in imports in April; the 12.8 percent year-on-year drop was nearly double the retraction of 6.5 percent the previous month. With that indicator, along with the steady decline in inflation—the BSP has revised its full-year inflation forecast downward to 2.1 percent, which is probably still too high an estimate—shows that demand is dropping.
The import data did show that consumer and capital goods imports increased, but those are not the most important factors; the merchandise imports, which comprise raw materials and components for domestic production. And we should note that the import data was skewed at least slightly by the importation of rice; in reality, the decline in imports was most likely a bit worse than the 12.8 percent indicated.
The impression one gets from the BSP’s holding steady on monetary policy is that the central bank is playing with fire; the conservative, do-as-little-as-possible approach has worked well up until now, but there is a sense that economic conditions are shifting faster than the BSP’s perceptions of them. Currently, the Philippines is in the rather odd situation of having a huge money supply but fairly tight credit, two conditions that do not ordinarily go together, and are susceptible to a shock.
Nothing ventured, nothing gained
Where that shock may come from is a matter of speculation, but that the shock will come is not; there are far too many potential threats for the economy to escape completely unscathed. The likely result of the shock will be to reduce demand and spending even further, which, given the already razor-thin margin for flexibility the low inflation rate provides, could push the country into deflation.
Lowering interest rates would spur credit growth and transfer a significant part of the money supply to the active economy, which could easily absorb the increase in inflation that would happen as a result.
Lowering interest rates now, rather than later, would put the economy ahead of the shock, so that the result of a later downturn would simply move the indicators back to their present state, rather than an even lower growth trajectory.
The BSP’s conservative monetary policy has generally served the country well, but the current indicators of creeping stagnation demand a little more risk tolerance. Hopefully, it will not be too late for the BSP to take that leap of faith at its next policy meeting, which is scheduled for August 13.