For the third straight meeting, the policymaking Monetary Board (MB) yesterday decided to keep the interest rate on the Bangko Sentral ng Pilipinas’ (BSP) overnight reverse repurchase facility at 6.25 percent.
The interest rates on the overnight deposit and lending facilities were also retained at 5.75 percent and 6.75 percent, respectively.
Eli Remolona, BSP governor and MB head, said the MB “deemed it appropriate to maintain monetary policy settings to allow a moderation of inflation even as authorities continue to assess the emerging risks to the inflation outlook.”
“Latest baseline projections continue to show a return to the inflation target in the fourth quarter of 2023 despite a generally higher path for inflation relative to the previous forecast from the monetary policy meeting in June, reflecting mainly the impact of higher international oil prices,” Remolona said.
Latest forecasts show average inflation for 2023 is seen to reach 5.6 percent, while the average inflation forecasts for 2024 and 2025 now stand at 3.3 percent and 3.4 percent, respectively.
Remolona said inflation expectations for 2023 have remained steady, while those for 2024 and 2025 have declined slightly.
“Nonetheless, the balance of risks to the inflation forecast continues to lean towards the upside,” he added.
Potential price pressures include the impact of possible higher transport charges, higher minimum wage adjustments, persistent supply constraints on key food items, and the effects of El Niño weather conditions on food prices and power rates.
A weaker-than-expected global economic recovery remains the primary downside risk to the inflation outlook, Remolona said.
The MB also recognized the challenging outlook for economic growth “as the weaker GDP (gross domestic product) outturn for the second quarter of 2023 reflected a broad-based slowdown in domestic demand,” the central bank chief added.
“Household consumption slowed due to elevated commodity prices, while government spending contracted relative to the previous year,” Remolona said.
Michael Ricafort, RCBC chief economist, noted the possibility that year-on-year inflation could have topped out in the first quarter and may further ease gradually or even ease year-on-year significantly due to denominator effects.
“Mathematically, the peak in local inflation was already seen at 8.7 percent in January 2023, or shortly before the anniversary of the Russia-Ukraine war that led to the sharp increase in global commodity prices and the main source of the elevated inflation in many parts of the world,” Ricafort said.
“Thus, further local policy rate pause or even cuts could already be possible for the coming months, especially into 2024,” Ricafort said.
“Inflation in recent months largely due to supply-side factors, not due to higher demand thus any additional local policy rate hike may not necessarily be effective in addressing these supply-side inflationary pressures,” he added.
“Still, relatively higher local policy rates would lead to some increase in borrowing costs that could lead to lower earnings and valuations, as well as slow down the economy as an unintended consequence in the quest to fight off inflationary pressures,” Ricafort said.
