A pleasant morning to everyone! Today, the BSP publishes the 75th 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 second quarter of 2020.
For the first time since 1998, real GDP contracted by
0.2 percent in the first quarter of 2020. Manufacturing output shrank, while tourism-related services such as transportation, accommodation, and food service activities lost their momentum. Meanwhile, capital formation declined sharply due to the suspension of construction activities.
Consumer spending was also almost unchanged, as people stayed at home in observance of lockdown protocols.
By the second quarter of the year, the impact of the pandemic on the Philippine economy had become more apparent. The composite Purchasing Managers’ Index (PMI) fell below the expansion threshold as all surveyed industries reported weaker demand and lower output. The manufacturing sector, in particular, saw slower production orders, resulting in a decline in capacity utilization. New vehicle sales and energy usage likewise declined, indicating a broad-based weakening in aggregate demand.
These developments mirrored what was happening across the globe, as the pandemic prompted governments to deploy measures to limit the spread of the virus and mitigate its economic impact. Consequently, the outlook for global economic growth remains uncertain, with economists seeing considerable uncertainty and a protracted and uneven recovery in many jurisdictions.
Amid such headwinds, the BSP saw the need to remain proactive in easing its monetary policy stance. Following the 75-basis-point cut policy interest rate in the first quarter, the BSP reduced it again by 50 basis points each in April and in June.
The cumulative reduction of 175 basis points since February brought the overnight reverse repurchase rate to a record low of 2.25 percent.
Furthermore, to help ensure sufficient domestic liquidity in the financial system, the BSP reduced the reserve requirement ratios for larger banks and quasi-banks. The BSP also allowed an alternative mode of compliance with reserve requirements via new loans to encourage lending to micro, small, and medium enterprises (MSMEs) and other affected firms.
In terms of monetary operations, the BSP temporarily suspended the term deposit facility (TDF) auctions for some tenors and reduced the daily volume offering for the overnight reverse repurchase (RRP) facility.
Meanwhile, the BSP also opened a window to purchase government securities in the secondary market to help restore market players’ confidence in placing their investible funds in domestic bond issues. This helped ensure the proper functioning of the government securities market.
All these monetary responses were possible largely because of the ample policy room afforded by a benign inflation environment and well-anchored inflation expectations. Headline inflation eased further to an average of 2.3 percent in Q2 2020 from 2.7 percent in the previous quarter. This is well within the target range of 2–4 percent for the year. The slowdown in overall inflation was due mainly to the significant decline in global oil prices.
At the same time, the balance of risks to the inflation outlook continues to lean toward the downside for 2020 up to 2022 owing to the potential of the pandemic to further dampen aggregate demand.
These developments form the backdrop for the BSP’s policy actions during the second quarter of the year. While the lockdown was absolutely necessary to slow the spread of the virus, it disrupted economic activity in the near term. A grim outlook for the rest of the world had adverse implications for Philippine tourism and trade, as well as for inflows of foreign investment and remittances from overseas Filipinos.
As such, there remains a need for continuing measures to bolster economic activity and support financial conditions. With the easing of quarantine measures in the country since May, we believe that the BSP’s monetary policy actions and other relief measures will continue to gain traction and support the slow yet sustainable recovery of the domestic economy.
In particular, the BSP’s decisive actions have helped restore some calm in the domestic financial market. Optimism over the country’s response to the pandemic has been reflected in the stability of the peso. While trading in the equities market has remained volatile, activity in the government securities market has strengthened.
Indeed, bond issuances by the NG have been consistently oversubscribed, thus pushing yields down in line with the reductions in the policy rate.
Meanwhile, domestic liquidity conditions continue to stabilize, with robust growth in M3 indicating adequate liquidity in the financial system. However, we have also observed a slowdown in bank lending during the quarter.
As we will discuss in a separate presentation on the results of our latest Senior Bank Loan Officers’ Survey, there has been a tightening of bank lending standards. This is due to the less favorable economic outlook and to banks’ reduced tolerance for risk.
Nonetheless, banks remain on stable footing to weather the health crisis. The banking system’s asset quality has remained steady, while capital adequacy ratios have stayed above prescribed standards. The banking system has also exhibited asset and deposit growth, allowing them to provide intermediation services during the lockdown. Hence, there is enough reason to expect bank lending to pick up in the coming months with the gradual reopening of the economy.
Looking ahead, the BSP believes that keeping monetary policy sufficiently accommodative amid a benign inflation environment will continue to mitigate strong downside risks to growth and boost market confidence.
At this juncture, the continued stabilization of domestic liquidity dynamics has allowed the BSP to gradually reconfigure its monetary operations. Beginning in June, the BSP has reopened the other tenors of the TDF facility and has rescaled its daily RRP offerings. These operational adjustments will reinforce our prior liquidity-enhancing measures and facilitate their transmission to market interest rates, loan growth, and eventually to overall economic activity.
In closing, the BSP recognizes that addressing the pandemic requires a “whole-of-government” approach to limit any scarring on the economy.
For this reason, we reiterate our support for the health and fiscal programs already being rolled out by the National Government in responding to the needs of Filipino households and businesses. At the same time, we remain committed to deploying our full range of monetary instruments and regulatory relief measures as needed in fulfillment of our mandate to promote non-inflationary and sustainable growth.
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 the two presentations followed by your questions.
Thank you, and good morning.