As inflation is still projected to revert within the target range by the fourth quarter, the Monetary Board yesterday decided to maintain the Bangko Sentral ng Pilipinas’ (BSP) key rates but stressed that it is ready “to resume its tightening actions in the face of upside risks and potential second-round effects that could dislodge inflation expectations.”
After the fourth straight meeting, the Target Reverse Repurchase (RRP) Rate is still at 6.25 percent. The interest rates on the overnight deposit and lending facilities were retained at 5.75 percent and 6.75 percent, respectively.
Eli Remolona, BSP governor and Monetary Board chairman, said the latest BSP baseline projections show a slightly higher inflation path but “it is still projected to revert to the 2 to 4 percent target range by Q4 2023 in the absence of further supply-side shocks.”
“While food and transport prices continue to drive headline inflation, core inflation has moderated further, implying an easing in underlying pressures. In addition, inflation expectations remain anchored to the target range over the policy horizon,” Remolona said.
Remolona added the Board is ready to raise rates “if shocks are significant enough.”
“While (rate) cuts are off the table for 2023, (rate) hikes are not,” Remolona said.
Average inflation is now seen to reach 5.8 percent in 2023 from 5.6 percent previously, while the forecast for 2024 likewise rose to 3.5 percent from 3.3 percent.
For 2025, the forecast is unchanged at 3.4 percent.
Remolona said the upward adjustments in the 2023 and 2024 projections “reflect the spillovers from weather disturbances, rising global crude oil prices, and the recent depreciation of the peso.”
He also said the balance of risks to the inflation outlook “remains skewed toward the upside.”
“The major upside risks to the inflation outlook are the potential impact of further adjustments in transport fares and electricity rates,” he said.
He said the Board noted that recent indicators of domestic economic activity “pointed to waning pent-up demand, even as the impact of prior monetary policy tightening continues to weigh on credit.”
The Monetary Board also reiterated the need for non-monetary interventions, including the temporary reduction of import tariffs with calibrated volumes and timely arrival of import commodities.
Higher prices for oil and key agricultural commodities drove inflation faster in August, hitting 5.3 percent from 4.7 percent in July.
According to the Philippine Statistics Authority, the uptrend in the overall inflation “was primarily influenced by the higher year-on-year increase in the heavily-weighted food and non-alcoholic beverages at 8.1 percent during the month from 6.3 percent in the previous month.”
August’s upturn brings the national average inflation to 6.6 percent, still above the government’s target range of between 2 and 4 percent.
Michael Ricafort, Rizal Commercial Banking Corp. chief economist, said if local inflation reaches the BSP’s target range of between 2 and 4 percent by the fourth quarter of this year, “this could support a possible cut in local policy rates as early as the first quarter of next year as signaled by some local authorities.”
“Local policy rates would still be largely a function of future Fed rate moves (pause or hike) as well, fundamentally, the local inflation trend, and the behavior of the peso exchange rate, which affects import prices and overall inflation,” Ricafort said.
However, Ricafort said the cumulative hikes of +4.25 in local policy rates since May 2022, at some point, could become a drag on loan growth and overall economic growth.
