The Bangko Sentral ng Pilipinas (BSP) kept interest rates steady in its meeting yesterday, the second time in a row, keeping the overnight borrowing rate at 6.25 percent, citing slowing inflation.
The BSP said the interest rates on the overnight deposit and lending facilities were also retained at 5.75 percent and 6.75 percent, respectively.
BSP Governor Felipe Medalla said the BSP’s policy making Monetary Board deemed it necessary to keep rates steady “to allow the BSP to further assess how inflation and domestic demand responded to the tighter monetary conditions.”
“While the domestic growth momentum is expected to remain over the near term, present indicators suggests a likely moderation in economic activities over the horizon, reflecting the impact of the BSP security policy rate adjustment, as well as the weak global growth prospects,” said Medalla.
“However, lingering upside risks to inflation outlook also warrant continued vigilance against potential second round effects. Going forward, the BSP remains prepared to resume monetary tightening as necessary, in line with this data dependent approach to ensuring price and financial stability,” he added.
The BSP’s latest baseline projections continue to suggest a gradual return of inflation to the target band of 2 to 4 percent over the policy horizon. Average inflation for 2023 is projected to settle at 5.4 percent, slightly lower than 5.5 percent previously, while the average inflation forecast for 2024 now stands at 2.9 percent from 2.8 percent, according to Francisco Dakila, BSP deputy governor.
For 2025, inflation is expected to average at 3.2 percent.
“Meanwhile, inflation expectations for 2023 are also lower, while those for 2024 and 2025 appear to have settled firmly within the target range,” the BSP said in a statement.
Medalla said the central bank policy thrust is coming to a point “where the main driver of the policy rate is domestic inflation.”
Medalla is keeping his view that the BSP can keep its current stance on the trajectory of rate hikes should the US keep its planned rate hikes at 25 basis points per meeting.
“Now, of course, if the Fed does a 50, it’s very hard not to respond because right now, the forex market is too sensitive to the interest rate differential,” he said.
The BSP noted both headline and core inflation decelerated further in May due mainly to slower increases in the prices of food and energy-related items, affirming expectations of a return to target range by year’s end.
Recent demand indicators suggest a likely moderation in economic activity over the policy horizon, reflecting the impact of the BSP’s cumulative policy rate adjustments as well as weak global growth prospects, it said.
“Going forward, the BSP remains prepared to resume monetary tightening as necessary, in line with its data-dependent approach to ensuring price,” the BSP added.
