BSP starts calibrated exit strategy
Amid the Philippine economy’s solid rebound from the COVID-19 crisis, the Bangko Sentral ng Pilipinas (BSP) has begun its exit from the extraordinary measures it implemented to support recovery.
Given that the economic recovery is in its nascent stage, the BSP is implementing the “exit strategy” in a calibrated manner, making sure not to hamper the recovery momentum.
The BSP recognizes the consequences of ill-timed exit.
On one hand, winding down too early may dampen, if not stall, the economic recovery. On the other, late withdrawal may cause inflationary pressures and financial stability issues (for instance, keeping interest rates at a record low for too long may lead to excessive credit activities).
As such, the BSP strikes a delicate balance between providing adequate support to the economy and preventing the buildup of inflationary pressures and risks to financial stability. It does so by implementing the exit strategy in phases and in a well calibrated manner.
Committed to transparency, the BSP has already communicated to the press as well as to selected market participants the broad elements and broad sequence of the BSP’s exit strategy.
The first component involves the recalibration of the BSP’s monetary operations, such as the reduction in the amount of government securities it purchases in the secondary market. In the latter part of 2021, the BSP started to reduce its GS purchases amid improvements in the country’s COVID-19 situation.
The second component involves the unwinding of the measures that infused liquidity directly into the economy, such as the provisional advances to the National Government and the alternative compliance with reserve requirements (i.e., the temporary policy that considers loans extended to MSMEs and other critical enterprises as part of banks’ compliance to the reserve requirement).
From the original amount of P540 billion during the height of the COVID-19 crisis, the BSP’s provisional advances to the National Government was reduced to P300 billion, which the National Government eventually paid in full on 20 May 2022.
The third component entails the reduction in monetary accommodation or the raising of the policy interest rate as prospects for the economy to materially improve. On 23 June 2022, the BSP raised its key policy rate by 25 basis points to 2.5 percent, following the economy’s robust growth of 8.3 percent in the first quarter of 2022.
The final component involves building of buffers to ensure that the economy is prepared and resilient should another crisis strike.
The exit strategy is not calendardriven and instead remains state-based, especially as global economic uncertainty persists.
By observing a calibrated approach to exit strategy, the BSP is making sure the Philippines’ economic recovery is sustained, and price and financial stability is broadly maintained for the benefit of all Filipinos.