The Only Game in Town

As the Philippine central bank implements monetary actions to cushion the economic impact of the Covid-19 pandemic, what is the effect of these policy tools on the real economy? What other policy actions should the bank introduce?

Highlights

The COVID-19 crisis has prompted central banks around the world to take unprecedented monetary actions to cushion the economic impact of the pandemic. Most central banks have taken proactive steps to introduce policy measures meant to ensure sufficient liquidity and access to credit. This approach is best described as “whatever it takes”—famously coined by Former European Central Bank (ECB) President Mario Draghi in 2012.

The “whatever it takes” approach is seen in the plethora of tools introduced by various central banks in response to the crisis. Apart from conventional tools such as the policy interest rate and reserve requirement ratio, central banks—particularly those in developed markets—have taken to unorthodox methods to fulfill their mandate. The US Federal Reserve cut rates to near zeropercent, committed to buying corporate bond exchange traded funds, and expanded its municipal liquidity facility. The ECB announced a pandemic emergency purchase program amounting to EUR 750-billion. The Bank of Australia ventured into targeting the three-year Australian government bond yield at 0.25-percent and introduced a term funding facility to lower funding costs for the broad banking system.

For its part, the Bangko Sentral ng Pilipinas (BSP) purchased PhP 300-billion in government securities from the Treasury, on top of cutting the policy rate by 125 basis points to 2.75-percent and reducing the reserve requirement ratio by 200 basis points to 12.0-percent. BSP Governor Benjamin Diokno said that “we will do everything necessary to avoid a recession in the Philippines” and that the Philippine central bank has more tools in its arsenal to combat the economic fallout from COVID-19 (“Philippines vows to ‘do everything necessary’ to avoid recession,” Financial Times, 01 April 2020).

It is known that monetary policy actions come with a “lag”—the Bank for International Settlements estimates such lag to last for about five to six quarters for Australian farm and nonfarm output. Hence in the current context, the effects of the actions by central banks will likely be felt in the next one to two years, when global economies are supposedly in the recovery stage.

Worth exploring also, however, is the “reach” of these policy tools to the real economy, which are primarily realized in the form of credit and eventually in domestic demand. Despite the extraordinary measures taken by central banks, financial institutions are in a precarious situation and will likely be cautious with lending activities—largely driven by concerns on loss provisioning and non-performing loans. As a result, the supposed impact of monetary stimulus is thinned by its transmission mechanism.