With inflation now seen hitting the target range of the government for this year and next, the policymaking Monetary Board yesterday decided to keep the key rates of the Bangko Sentral ng Pilipinas (BSP) steady.
The BSP’s overnight reverse repurchase facility stays 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.
Benjamin Diokno, BSP governor and Monetary Board chief, said latest inflation forecasts indicate that “inflation is likely to settle within the target range in 2021 and 2022” at between 2 and 4 percent.
“Inflation is now projected to track a slightly lower path in 2021 to average near the upper end of the target band, as price pressures on food commodities are abating with improved weather conditions, the impact of Executive Orders Nos. 128 and 133 and the implementation of direct non-monetary interventions to alleviate supply constraints,” Diokno said.
Francisco Dakila, BSP deputy governor, said 2021 inflation is now seen to average at 3.9 percent from the previous 4.2 percent forecast.
“2021 forecast is now within target band. Downward revision was due to impact of lower tariffs on imported pork, lower inflation both for March and April, impact of the first quarter GDP (gross domestic product) outturn and implications of that on economic activity in the first half of the year as well as continued appreciation of the peso,” Dakila said.
He added that factors that moderated the forecast include higher global oil and non oil prices.
For 2022, full-year inflation will likely settle at 3.0 percent from the previous 2.8 percent forecast “due to the impact of increases in global crude oil prices as well as faster prospects for economic growth for next year.”
Diokno said the risks to the inflation outlook “are also broadly balanced.”
“The Monetary Board emphasizes that the timely implementation of approved non-monetary measures will be crucial in mitigating further supply-side pressures on meat prices and inflation,” Diokno said.
Inflation hit 4.5 percent in April, pushed by increases in the indices of transport, health, housing and utilities.
April’s figure is the same as March’s 4.5 percent and twice as fast as the 2.2 percent posted in April last year.
The Philippine Statistics Authority (PSA) said this brings the average inflation at the national level from January to April 2021 to 4.5 percent, still above the full-year target range of between 2 and 4 percent set by the government.
“Varied annual growth rates in the indices of the commodity groups were observed in April 2021,” PSA maintained.
The government agency, however, stressed that inflation slowed down in the indices of food and non-alcoholic beverages at 4.8 percent and alcoholic beverages and tobacco at 12 percent.
PSA added that, excluding selected food and energy items, core inflation decelerated to 3.3 percent in April 2021, from 3.5 percent in the previous month.
Diokno said the Monetary Board expects the domestic economy to continue to recover in the coming months, aided by the government’s targeted fiscal interventions and the sustained rollout of its vaccination program.
“Improved prospects overseas should also support the outlook for domestic economic activity. However, the recent surge in COVID-19 infections and the resulting measures to contain it continue to temper market confidence and pose substantial downside risks to domestic demand,” Diokno said.
The Philippines continues to be in recession as the GDP posted its fifth consecutive quarter of decline in the first quarter at 4.2 percent.
The economy’s contraction in the first quarter represented a sharper drop versus the first quarter of 2020’s 0.7 percent.
The year-on-year performance in the first quarter however was better than the second, third and fourth quarters of 2020 when the economy shrank 17 percent, 11.6 percent and 8.3 percent, respectively.
Nicholas Mapa, ING Bank Philippines senior economist, said the economy remains stuck in low gear “as all sectors outside government posted declines.”
“High unemployment and depressed consumer confidence weighed on overall activity with mainstay household consumption in the red again,” Mapa said.
With the outlook dimming with the full impact of the renewed community quarantines to be felt in the second quarter, Mapa said focus shifts to BSP’s policy.
“Any expectations for a reversal in policy stance appear unjustified for now as the economy is clearly in need of more stimulus and not less. Second round effects have not surfaced while inflation expectations remain anchored for the time being,” Mapa said.
Mapa said the contraction in GDP coupled with the breach in the inflation target “has pushed the narrative of stagflation once more.”
“Q2 GDP will likely revert to growth but mainly due to base effects after the plunge of 16.9 percent last year. The good news is that inflation does appear to have leveled off with authorities recently implementing supply side remedies to the pork price surge such as increased importation and now the recent declaration of state of calamity. We expect inflation to decelerate in the coming months to hopefully restore some purchasing power to households at a time when economic prospects remain subdued,” Mapa said.
Diokno stressed the expected path of inflation and downside risks to domestic economic growth warrant keeping monetary policy settings steady.
“The Monetary Board believes that sustained support for domestic demand remains a priority for monetary policy, especially as risk aversion continues to hamper credit activity despite ample liquidity in the financial system. The BSP affirms that maintaining an accommodative stance should quicken the economy’s transition toward a sustainable recovery,” Diokno said.
