The Monetary Board yesterday decided to keep the key rates of the Bangko Sentral ng Pilipinas (BSP) unchanged as it sees downside risks to domestic economic growth and the likelihood of inflation remaining above government target.
The interest rate on the BSP’s overnight reverse repurchase facility remains at 2 percent, while the interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.
This is the sixth straight session that the policymaking body decided to keep the key rates steady.
Benjamin Diokno, BSP governor and head of Monetary Board, said they are of the view that the expected path of inflation and downside risks to domestic economic growth “warrant keeping monetary policy settings unchanged.”
“The Monetary Board remains keen on sustaining monetary policy support for as long as necessary in order for the momentum of economic recovery to gain more traction as well as to help boost domestic demand and market confidence, especially as risk aversion continues to temper credit activity,” Diokno said.
The central bank chief said latest inflation forecasts “have shifted marginally higher,” reflecting the recent increase in global commodity prices and the depreciation of the peso.
They now see inflation to hit an average of 4.1 percent this year, slightly higher from the previous forecast of 4 percent. The government’s target range is set at between 2 and 4 percent.
Inflation’s seven-month average stands at 4.4 percent after prices slowed down in July, hitting its slowest so far this year at 4 percent.
“Average inflation is seen to settle slightly above the upper end of the target band of 2-4 percent in 2021,” Diokno said.
He, however, stressed that with the continued and timely implementation of non-monetary initiatives and reforms to mitigate supply-side pressures on meat and other food prices, “inflation is projected to ease towards the midpoint of the target range in 2022 and 2023.”
“The risks to the inflation outlook remain broadly balanced over the policy horizon. The uptick in international commodity prices due to improving global demand amid lingering supply-chain bottlenecks could lend upside pressures to inflation. However, downside risks to the inflation outlook are also seen from the spread of more contagious coronavirus variants,” Diokno said.
Diokno said inflation will likely “decelerate back to within the target by end of the year as the impact of government supply-side measures take effect.”
But he said delays in the lifting of containment measures could further dampen prospects for global growth and domestic demand.
The government placed the country’s capital under the strictest quarantine measure for 14 days which started last August 6.
“The reimposition of quarantine measures to arrest the recent wave of COVID-19 infections could pose a risk to the ongoing economic recovery. To this end, targeted fiscal and health interventions, especially the acceleration of the government’s vaccination program, will be crucial in safeguarding public health and preventing deeper negative effects on the Philippine economy,” Diokno said.
The country’s gross domestic product grew 11.8 percent in the second quarter of the year, a rebound from the 17-percent contraction last year.
The government said the second quarter growth is the second highest growth of the Philippine economy on a quarterly basis, since the fourth quarter of 1988 when the economy grew 12 percent.
The economy churned in a value of P488.83 billion for the period, up from P370.35 billion in the second quarter of 2020.
Diokno said “the BSP continues to prioritize the use of monetary policy space to provide support to economic activity amid the pandemic.”
“The accommodative monetary policy and liquidity-enhancing measures of the BSP continue to provide favorable credit conditions and the orderly functioning of the government securities market. The monetary policy stance remains important in keeping the Philippine economy on the path towards sustainable recovery. In line with this, the BSP is keen on sustaining monetary policy support for as long as necessary in order to help the economic recovery gain more traction,” Diokno said.
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.
