The policymaking Monetary Board yesterday decided to keep the key rates of the Bangko Sentral ng Pilipinas as forecasts show inflation, although still above the government’s target, moderated over the policy horizon.
BSP’s Target Reverse Repurchase (RRP) Rate was kept at 6.5 percent. The interest rates on the overnight deposit and lending facilities will still be at 6 percent and 7 percent, respectively.
These rates were adjusted two weeks ago after the Board did an off-cycle action. Key rates are now at their highest in more than 16 years.
Francisco Dakila, BSP Deputy Governor, speaking for the Board, said “keeping the policy rate steady will allow previous policy interest rate adjustments, including the interest rate increase in October, to continue to work their way through the economy.”
While the risk-adjusted inflation forecasts remain above the government’s target range for 2024 at 4.4 percent, it was, however, lower than the 4.7 percent in the previous meeting in October and within the target for 2025 at 3.4 percent.
The target range for both years was set at between 2 and 4 percent.
“Supply-side inflation pressures continue to ease due in part to the National Government’s non-monetary interventions as well as seasonal factors,” Dakila said.
“Nevertheless, the balance of risks to the inflation outlook still leans significantly toward the upside, notwithstanding the recent improvement in food supply conditions.”
Key upside risks, according to Dakila, are associated with the potential impact of higher transport charges, electricity rates, and international oil prices, as well as of higher-than-expected minimum wage adjustments in areas outside the National Capital Region.
The impact of a weaker-than-expected global recovery as well as government measures to mitigate the effects of El Niño weather conditions, meanwhile, could reduce the central forecast.
“On balance, the rebound in Q3 GDP growth supports the view that the country’s medium-term growth prospects remain largely intact, even as pent-up demand continues to diminish in the near term. The BSP will also continue to assess how firms and households are responding to tighter monetary policy conditions, especially as credit growth continues to moderate,” Dakila said.
“The Monetary Board reiterates its support for the national government’s efforts to sustain growth through programmed spending, as well as non-monetary intervention measures to mitigate the impact of lingering supply-side factors on inflation,” Dakila added.
Dakila stressed the Monetary Board “continues to deem it necessary to keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes fully evident and inflation expectations are firmly anchored.”
“Guided by incoming data, the BSP remains prepared to resume monetary policy tightening as necessary to steer inflation towards a target-consistent path, in line with its price stability mandate,” Dakila said.
Aris Dacanay, Economist for Asean of HSBC Global Research, said with the domestic economy returning back to balance, they expect the BSP to keep policy rates steady until inflation credibly returns to target by the third quarter of next year.
“The BSP remained hawkish, signalling its readiness to hike policy rates if an inflation shock reignites any second round effects,” Dacanay said.
He said with the dollar-peso rate below 57 and with inflation in October surprising to the downside, “there was no urgent need for the BSP to hike just after the off-cycle hike in October.”
“The off-cycle move was for the central bank to give itself legroom in case the Fed hiked in November, which it did not. Global rice and oil prices are also off their peaks altough still elevated, which also gives the BSP some room to breathe. Nonetheless, the BSP remained hawkish – strongly highlighting that inflation risks are heavily tilted to the upside while signalling its readiness to hike policy rates if needed,” Dacanay said.
“With the current monetary stance already cooling credit, boosting savings, and guiding the domestic economy back to balance, we continue to expect the BSP to keep the policy rate at 6.5 percent but reiterate the BSP’s sensitivity to inflation shocks. And the upside surprise in 3Q 2023 growth should have given the BSP space to tighten its monetary grip if an inflation shock ripples in the form of second round effects. With headline inflation still finding itself above the BSP’s 2-4 percent target band for almost two years, this hawkish stance by the BSP shows its commitment to fulfil its inflation mandate. We continue to believe that rate cuts are off the table until 3Q 2024, when inflation is credibly well within the BSP’s 2-4 percent target band and when the Fed begins cutting rates,” Dacanay added.
