MANILA — The Philippine central bank has ample leeway to support the economic recovery, with conventional policy instruments far from being fully utilized, its governor said on Thursday.

The monetary policy remains oriented towards supporting economic recovery, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno told a regular news conference.

“The BSP believes that the current accommodative policy settings should be allowed to continue to work their way through the economy to bolster the recovery in private consumption and investment,” he said.

The Monetary Board’s next policy-setting meeting is on Sept. 23.

The Monetary Board has left policy rates unchanged at a record low since December, after cumulatively cutting rates by 200 basis points in 2020 to support the economy.

Despite the low rates, credit activity — which supports the economy’s capital formation — remains muted. Mr. Diokno is hopeful that lending growth will pick up once business confidence is restored when more people are vaccinated against the coronavirus disease 2019 (COVID-19).

“Credit activity may also turn around. While lending remains tepid, recent data show some signs of recovery,” Mr. Diokno said.

Outstanding loans by big banks slipped for the eighth consecutive month by 0.7% in July, softer than the 2% in June, BSP data showed. Borrowings for production activities slightly rose by 0.8% while retail loans continued to decline by 8.2%.

Even as economic managers lowered the full-year growth target to 4-5%, Mr. Diokno said the monetary policy decision “will always remain contingent on the outlook for inflation and its impact on economic growth.”

“In deciding on the stance of monetary policy, the BSP typically looks beyond the calendar year and focuses instead on the outlook for inflation and growth over the entire monetary policy horizon of two years,” Mr. Diokno said.

The central bank expects inflation to be above target at 4.1% this year before slowing to 3.1% by 2022 and 2023, which is within its 2-4% target.

It estimates August inflation likely breached the target at 4.1-4.9%. If realized, this would be quicker than the 4% in July, which was the first time that inflation rose within target since the 3.5% in December.

Inflation for the first seven months of the year was at 4.4%.

“Price pressures from supply side are manageable and less persistent, with a number of non-monetary measures already in place. This provides the BSP scope to look through the impact of high commodity prices and maintain its accommodative monetary policy stance while economic recovery remains feeble,” he said.

Meanwhile, Mr. Diokno assured its policy response “will not lead to excessive inflation and trigger financial stability risks.”

“When domestic developments warrant a recalibration or withdrawal of policy support, the BSP will ensure a smooth normalization of its time- and state-bound measures,” he added.

Mr. Diokno reiterated that fiscal support will play a key role to prevent “long-term” scarring in the economy.

“Direct fiscal support continues to be imperative given rising risks to household and corporate sector balance sheets and labor displacements resulting from a prolonged recourse to lockdown measures,” he said. — L.W.T.Noble and Reuters