Even while upside risks to inflation have increased as higher oil prices due to geopolitical tensions start to impact local commodity costs, the policymaking Monetary Board decided yesterday to maintain for the 11th consecutive session the key rates of the Bangko Sentral ng Pilipinas (BSP).
BSP’s overnight reverse repurchase facility remains 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.
“On balance, the Monetary Board sees scope to maintain the BSP’s policy settings in order to safeguard the momentum of economic recovery amid increased uncertainty, even as it continues to develop its plans for the gradual normalization of its extraordinary liquidity measures,” Benjamin Diokno, BSP governor, said.
But Diokno stressed that latest baseline forecasts “have increased from the previous monetary policy meeting, reflecting the impact of higher global commodity prices.”
The Monetary Board sees average inflation could breach the upper end of the full-year target range of between 2 and 4 percent in 2022 at 4.3 percent, higher than the February forecast of 3.7 percent.
“Nevertheless, average inflation is projected to decline and settle within the target band at 3.6 percent in 2023. Inflation expectations have likewise risen but continue to be anchored to the 2-4 percent target band,” Diokno said.
He added that the BSP estimates continue to indicate a potential target breach if crude oil prices are higher than the $95 estimates.
From the previous estimates of $83.23 per barrel, the BSP now sees Dubai crude prices to reach $102.23 per barrel “due to geopolitical tensions and the conflict between Ukraine and Russia.”
“In addition, we have included a higher non-oil price inflation, with current elevated price levels continuing for the first half of this year. Higher domestic oil prices are also expected to dampen domestic growth prices which could lead to second-round effects,” Diokno said.
While upside risks to inflation have increased for 2022, Diokno however said the balance of risks to the outlook remain broadly balanced for 2023.
“Upside risks over the near term continue to emanate from the shortage in domestic pork and fish supply as well as from the potential impact of higher oil prices on transport fares,” Diokno said.
In this regard, he said the BSP “supports the implementation of social protection measures to alleviate the impact of rising crude oil prices on vulnerable sectors.”
“Sustained initiatives to ensure adequate domestic food supply could also mitigate further supply-side pressures on inflation,” Diokno said.
He said downside risks are linked mainly to the lingering threat of coronavirus disease 2019 (COVID-19) infections, as the emergence of new variants could temper the global economic recovery and prompt the reimposition of domestic containment measures.
“Domestic economic activity has gained stronger traction with the easing of remaining mobility restrictions. However, heightened geopolitical tensions and a resurgence in COVID-19 infections in some countries have also clouded the outlook for global economic growth.
Supply-chain disruptions could also contribute to inflationary pressures, and thus warrant closer monitoring to enable timely intervention in order to arrest potential second-round effects,” Diokno said.
“Given the potential broadening of price pressures over the near term, the BSP stands ready to respond to the buildup in inflation pressures that can disanchor inflation expectations, in keeping with its price and financial stability objectives,” he added.
Economists at the Bank of the Philippine Islands (BPI), however, see the Monetary Board to hike the key rates by 75 basis points (bps) this year to 2.75 percent.
“Even with this magnitude of increase, the policy rate will still be below historical levels and it may not have a substantial impact on growth and employment. Furthermore, the impact of rate hikes is usually gradual and the economy has the capacity to absorb slightly higher interest rates especially now that demand is almost back to pre-pandemic level,” BPI said.
BPI added that a more significant risk to the country’s economic prospects is the depreciation of the peso, “which will increase the cost of oil that the country imports from abroad on top of the increase brought by the conflict in Ukraine.”
“A surge in consumer prices due to oil might eventually hurt consumer spending and lead to slower growth. Hiking the policy rate will serve as a stabilizing tool that could temper the depreciation of the peso. Also, this will likely prevent a substantial decline in Dollar reserves that could lead to more volatility in the local markets,” BPI said.
The bank also said the chances of an intermeeting/unscheduled BSP rate hike “are increasing because of oil and currency volatility.”
“Kicking the can further may eventually lead to a situation that could force the BSP to hike by more than 25 bps in one meeting, similar to what happened in 2018,” it added.
Inflation was steady at 3.0 percent in February 2022 from the previous month’s rate as the slowdown in inflation of heavily-weighted food items offset the increase in non-food inflation.
