Ladies and gentlemen, good morning! Today, the BSP publishes the 74th edition of the quarterly Inflation Report. This is part of the BSP’s efforts to convey to the public the overall thinking and analysis behind the BSP’s decisions on monetary policy during the first quarter of 2020.
The Philippines saw a difficult start to 2020, with the eruption of Taal Volcano in January and the beginning of the novel coronavirus outbreak in February. By mid-March, the COVID-19 crisis had turned into a full-scale pandemic, prompting governments and central banks around the world to deploy measures to limit the spread of the virus and mitigate its adverse impact on households and businesses. On the part of the BSP, we recognized right away that both the Taal eruption and the COVID-19 pandemic would pose significant disruptions to domestic economic activity in the coming months.
In response, we undertook a proactive policy response by easing our monetary policy settings to cushion the country’s growth momentum and uplift market confidence. In February, the BSP reduced the policy interest rate by 25 basis points (bps). We followed this with a reduction by another 50 bps in March. As the health crisis deepened, we also decided to deploy extraordinary liquidity measures and provide regulatory relief for financial institutions to complement the National Government’s (NG’s) broader fiscal and health initiatives to mitigate the impact of the pandemic on Filipino households and businesses.
All this was possible largely because of the ample policy room afforded by the manageable inflation environment, together with well-anchored inflation expectations. In line with our earlier projections, inflation at an average of 2.7 percent in Q1 2020, was well within the NG’s target range of 2.0 to 4.0 percent for the year. Headline inflation had risen slightly during the quarter owing to higher price increases of selected food and non-food items. Prices of fish, fruits and vegetables went up due partly to commercial fishing ban imposed on certain provinces and on weather-related supply disruptions. Transport inflation likewise picked up in the first quarter in view of upward adjustments in domestic petroleum products.
At the same time, the risks to the inflation outlook have decidedly shifted toward the downside by March of this year, mainly owing to the potential of the pandemic to dampen aggregate demand.
We believe that the timely adoption of quarantine measures will help in slowing the spread of the virus in the country. However, the resulting disruptions to domestic industries and private spending will definitely slowdown economic growth in the near term.
The spread of the COVID-19 outbreak to many countries has caused the global economy to go into recession. In turn, tourism, trade, foreign investments, and remittances from overseas Filipinos are expected to contract.
Indeed, there is now considerable uncertainty surrounding the near-term outlook for the Philippine economy. The real economy had just come off another solid year in 2019. Full-year growth settled within the medium-term average at 6.0 percent. However, suddenly the outlook for domestic economic activity has dimmed considerably in recent weeks.
Meanwhile, uncertainty over the impact of the health crisis has also dampened market sentiment, based on the BSP’s survey of business and consumer expectations. Volatility in the domestic financial market also increased, with the Philippine stock market index taking a deep decline in Q1 2020 as investors became more risk-averse.
Auction results in the primary market for government securities during the early part of the quarter likewise reflected investors’ risk aversion. By the end of the quarter, the yields for government securities in the secondary market generally have increased relative to end-December 2019 levels as market players opted to hold on to liquidity in anticipation of substantial funding requirements in view of the enhanced community quarantine.
The country’s debt spreads also widened along with its international peers as the global financial system faced negative shocks from the impact of the global pandemic.
Nevertheless, the country’s firm macroeconomic fundamentals supported the financial system. The peso even appreciated from the previous quarter, as investors welcomed the country’s credit rating outlook upgrade by Fitch Ratings in February.
Further, based on the BSP’s latest senior loan officers’ survey, bank lending standards have been broadly unchanged, indicating their continued prudence in managing risks.
Banks’ asset quality and capital adequacy indicators pointed to the soundness of the country’s financial system yet, the BSP remains vigilant over how credit activity and domestic liquidity dynamics will evolve in the coming months.
These developments form the backdrop for the BSP’s policy actions during the first quarter of the year. Strong headwinds owing largely to the COVID-19 pandemic required swift and decisive monetary action. The cumulative reduction of 75 bps in the policy rate during the quarter, which we followed up with another cut of 50 bps just last week, was necessary to support domestic economic activity and boost market sentiment.
Furthermore, to help ensure sufficient domestic liquidity in the financial system and lower borrowing costs for affected firms and households, the BSP reduced the reserve requirement ratios for universal and commercial banks and non-bank financial institutions with quasi-banking functions, which took effect on 3 April. The BSP also temporarily reduced the term deposit facility (TDF) auction volumes to zero for particular tenors. These measures complement the various regulatory relief measures the BSP put in place to facilitate the flow of credit and ensure the delivery of financial services amid the quarantine period.
To help shore up market confidence and support the NG’s broader initiatives to fight COVID-19, the BSP also implemented extraordinary liquidity measures. These include: first, the P300-billion repurchase agreement with the Bureau of the Treasury (BTr), and second, the BSP’s purchases of government securities from banks in the secondary market.
In closing, the BSP has implemented measures to safeguard the stability of the macroeconomy and provide support for the National Government’s broader efforts to alleviate the spillover effects of the pandemic. We wish to reassure the Filipino people of the BSP’s commitment and readiness to deploy its full range of instruments in responding to the needs of Filipino households and businesses amid these difficult times.
Ladies and gentlemen, the full text of the Inflation Report, as well as the latest results of the BSP’s quarterly survey of senior bank loan officers, shall be made available via the BSP website shortly after this videoconference. In the meantime, we now open the floor for your questions.
Thank you and good morning.