Key rates of the Bangko Sentral ng Pilipinas were kept steady for the fifth straight session yesterday as economic recovery momentum remains “tentative” even if inflation is still seen to settle within the government’s target range for this year.
The Monetary Board decided to maintain the interest rate on the BSP’s overnight reverse repurchase facility at 2.0 percent.
The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.
Central banks reduce interest rates to encourage borrowing and investing, thereby possibly stimulating economic growth but may hasten inflation.
Rates are raised, meanwhile, when there is too much growth, which is not the case now.
The Philippines posted its worst economic contraction on record in 2020 as it shrank 9.5 percent due to the impact of the coronavirus disease 2019 (COVID-19) pandemic.
Benjamin Diokno, Bangko Sentral ng Pilipinas Governor and Monetary Board chief, said although economic activity has improved in recent weeks, “the overall momentum of the economic recovery remains tentative as the threat of COVID-19 infections continues.”
“The sustained implementation of targeted fiscal initiatives as well as the acceleration of the government’s vaccination program should help boost market confidence and recovery of the economy in the coming months,” Diokno said.
Diokno, however, stressed the latest inflation forecasts indicate that the average inflation is likely to settle near the upper end of the target range of 2-4 percent in 2021 and will ease towards the midpoint of the target range in 2022 and 2023.
Francisco Dakila, BSP Deputy Governor, said inflation forecasts for 2021 slightly increased to 4 percent from the previous 3.9 percent. For 2022, inflation is seen to average at 3 percent, also slightly higher from the 2.9 percent earlier forecast.
“The factors include higher global crude prices as well as the more favorable global growth outlook. These were offset by lower than expected outturn in May inflation as well as the continued strength of the peso,” Dakila said.
Dakila also announced that for 2023, they are maintaining the 2 to 4 inflation target range, with full-year forecast likely to average at 3 percent.
The country’s headline inflation in May remained at 4.5 percent, the same level since March.
The country’s average headline inflation from January to May 2021 was posted at 4.4 percent.
Diokno said price pressures on food commodities “have abated with favorable weather conditions and the facilitation of meat imports to augment domestic supply.”
“The Monetary Board emphasizes that the continued implementation of direct non-monetary measures will be crucial in mitigating further supply-side pressures on meat prices and inflation,” Diokno said, adding that the risks to the inflation outlook remain broadly balanced around the baseline projection path.
“However, downside risks to the inflation outlook continue to emanate from the emergence of new coronavirus variants, which could delay the easing of containment measures and temper prospects for domestic growth,” Diokno said.
Diokno said that they have also observed that the expected path of inflation and downside risks to domestic economic growth warrant keeping monetary policy settings unchanged.
“The Monetary Board believes that sustained monetary policy support for domestic demand should help the economic recovery gain more traction, especially as risk aversion continues to temper credit activity despite ample liquidity in the financial system,” Diokno said.
“The BSP affirms its support to the economy for as long as necessary to ensure its strong and sustainable recovery,” Diokno stressed.
Nicholas Mapa, ING Bank Philippines senior economist, the Monetary Board will be “on hold for a little longer.”
“Diokno reiterated his pledge to provide policy support to the economic recovery ‘for as long as needed’ with economic momentum still weighed down by a relatively high incidence of Covid-19. With price pressures fading and inflation set to slide back within target in the coming months, we expect BSP to extend its pause for the balance of the year with a possible rate hike by the middle of next year,” Mapa said.
Mapa also said they expect peso to remain pressured in the near term on anxiety over the timing of the Fed taper with BSP likely holding off on hiking policy rates to jumpstart stalling bank lending and revive the ailing economy.
“The recent Fed tinker or the adjustment to the Fed’s interest rate projections has sparked a wave of concern for emerging markets with currencies in the region coming under pressure recently. The peso’s downturn in the last few trading sessions has been tagged to this development with foreign investors exiting the local stock market. Diokno’s recent comments in connection to this development suggest that the BSP is preparing for the eventual Fed taper of its asset purchases and inevitable rate hike. Diokno however reassured investors that the Philippine financial system was ready for these eventualities given its improved external position,” Mapa said.
