As higher global oil prices and desperate supply chain crunch continue to hasten inflation worldwide, the Monetary Board yesterday decided to raise the interest rate on the key rates of the Bangko Sentral ng Pilipinas (BSP) by another 25 basis points.
BSP’s overnight reverse repurchase facility now stands at 2.5 percent. Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 2 percent and 3 percent, respectively.
Benjamin Diokno, BSP governor and Monetary Board chief, said the Board noted “upside risks continue to dominate the inflation outlook up to 2023.”
“Pressures are emanating from the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, as well as pending petitions for transport fare hikes due to elevated oil prices,” Diokno said.
He added the impact of a weaker-than-expected global recovery and the possible reimposition of local COVID-19 restrictions amid an uptick in infections continue to be the main downside risks to the outlook.
“Given these considerations, a follow-through increase in the policy rate enables the BSP to withdraw its stimulus measures (due to the pandemic) while safeguarding macroeconomic stability amid rising global commodity prices and strong external headwinds to domestic economic growth,” Diokno said.
BSP’s latest baseline forecasts, according to Diokno, have shifted higher with average inflation projected to breach the upper end of the 2 to 4 percent target range at 5.0 percent in 2022 and 4.2 percent in 2023.
Inflation expectations have continued to rise.
“While they remain within the target range for 2023-2024, elevated expectations highlight the risk of further second-round effects arising from sustained price pressures,” Diokno said.
Faster price increases in transportation, gas, alcoholic beverages and some food items pushed inflation to 5.4 percent in May, the fastest recorded output since December 2018’s 5.2 percent.
Francisco Dakila, BSP deputy governor, said they see inflation averaging 5.6 percent in the second half of this year.
“The path also suggests that inflation is likely to remain above the target range for the first half of 2023. Risks are tilted to the upside both for this year and next, due to higher global oil prices. (But) we expect inflation to balance out by 2024,” Dakila said.
Dakila added economic recovery is continuing to gain traction, helped by the loosening of restrictions on mobility and the essential reopening of the global economy and improving labor conditions.
“We continue to see uncertainties coming from the possible dampening of global growth as central banks normalize and risks coming from the pandemic lockdowns that could impact growth of our major trading partners like China,” Dakila also said.
Diokno said the Monetary Board reiterates its support for the “carefully coordinated efforts of other government agencies as part of a whole-of-government approach in implementing non-monetary interventions to mitigate the impact of persistent supply-side factors on inflation.”
“In line with the ongoing normalization of its monetary policy settings, the BSP is prepared to take all necessary policy action to bring inflation toward a target-consistent path over the medium term and deliver on its primary mandate of price stability,” he added.
