​Monetary policy response to covid-19

PHILIPPINES - In Brief 19 Mar 2020 by Romeo Bernardo

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The Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) today introduced a package of measures to help combat the adverse effects of the covid-19 on domestic economic activity. These included: (1) a 50bp cut in the set of policy rates, with the key overnight borrowing and lending rates reduced to 3.25% and 3.75%, respectively; (2) temporarily setting the interest rate on its rediscounting facility equal to the lending rate[1]; and (3) authorizing certain regulatory forbearance for banks involving more relaxed rules on compliance reporting, calculation of penalties on required reserves, and single borrower limits. Per its statement, given the significant downward adjustment in its inflation forecast (2.2% this year and 2.4% next), the set of measures is intended not only to support growth momentum and uplift market confidence but mitigate the risk of financial sector volatility, ensure adequate domestic liquidity and credit in the financial system, and lower borrowing costs for affected firms and households. While signaling readiness to provide other supplemental measures[2], the MB nonetheless stressed the need for “urgent and carefully coordinated measures with other government agencies to alleviate the spillover effects of the pandemic on people and firms, with a view toward preventing any long-lasting economic and social damage.” We agree with this. As we said in our Note yesterday, policy stimulus needs to provide quick relief to affected sectors to avert a deeper decline in GDP growth and ensure more rapid recovery. As monetary policy works with a lag, the greater burden at this time falls on fiscal policy, which needs to provide immediate support not onl...