The Bangko Sentral ng PIlipinas could pause its interest rate-hiking cycle at its meeting next month due to easing inflation, its governor said on yesterday in a briefing held in Washington D.C., US.
“We are probably pausing in the next meeting because the inflation prints are very good,” BSP Governor Felipe Medalla said.
Tempered inflation in April puts monetary authorities in a position to pause policy, Medalla said, adding that the inflation average for 2023 will be revised downwards from the 6 percent projection.
The policymaking Monetary Board next meets on May 18 to set benchmark interest rate, which it has raised by 425 basis points since last year to 6.25 percent.
The BSP was Asia’s most aggressive central bank in raising interest rates to combat elevated inflation and keep up with the US Federal Reserve’s tightening cycle.
The Fed’s actions are still relevant but less of a factor in its decision making, Medalla said, adding that monetary policy is largely driven by inflation.
Inflation dropped to 7.6 percent year-on-year in March from 8.6 percent in February.
The resulting year-to-date average of 8.3 percent is above the Government’s average inflation target range of 2.0-4.0 percent for the year.
In contrast, core inflation, which excludes selected volatile food and energy items to depict underlying demand-side price pressures, rose further to 8.0 percent in March from 7.8 percent in February.
On a month-on-month seasonally adjusted basis, inflation was nil in March from 0.3 percent in the previous month.
“Headline inflation declined due largely to lower inflation for food and energy-related items in the CPI basket. Inflation for food items eased during the month with improvements in the domestic supply of key food commodities, particularly for vegetables, meat, and sugar. Likewise, transport inflation decelerated further in March, reflecting the rollbacks in petroleum pump prices following the decline in global crude oil prices. Similarly, inflation for electricity, gas, and other fuels also fell during the month,” Medalla said.
He said the latest inflation figure remains consistent with the BSP’s assessment “that inflation will remain elevated in the near term but gradually revert towards the target range in end-2023.”
“Nevertheless, the risks to the inflation outlook continue to lean towards the upside for both 2023 and 2024. Going forward, therefore, the BSP remains vigilant against inflation risks over the policy horizon and is prepared to adjust its monetary policy settings as needed in line with its price stability mandate,” Medalla said.
At its meeting on monetary policy last month, the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 25 basis points to 6.25 percent.
The interest rates on the overnight deposit and lending facilities were accordingly set to 5.75 percent and 6.75 percent, respectively.
“The Monetary Board’s decision was based on the sum of new information and its assessment of the effects of past policy actions, which warranted a continuation of monetary tightening to anchor inflation expectations. With core inflation rising in February despite a modest decline in headline inflation, further monetary policy action was deemed necessary to address broadening price impulses emanating from robust domestic demand and lingering supply-side constraints,” Medalla said.
The latest baseline projections point to an elevated path over the near term. Average inflation is projected to settle above the upper end of the 2-4 percent target range at 6.0 percent in 2023 before returning to the target at 2.9 percent in 2024.
The inflation forecasts reflect the cumulative impact of the BSP’s policy rate adjustments and the slower growth outlook on both the domestic and external fronts.
Medalla said inflation expectations have increased slightly for 2023, while those for 2024 and 2025 remain near the upper end of the target band.
“The balance of risks to the inflation outlook for 2023 and 2024 also continue to tilt heavily towards the upside. The effect of supply shortages on domestic food prices remains a concern, while the potential impact of higher transport fares, increasing electricity rates, as well as above-average wage adjustments in 2023 point to the broader-based nature of price pressures. On the downside, the impact of a weaker-than-expected global economic recovery continues to be the primary factor that could dampen inflation,” Medalla said.
Given these considerations, Medalla said the Board decided that follow-through monetary action would help ease persistent price pressures from here and abroad as well as further realign inflation expectations with the target band over the policy horizon.
“Further policy tightening will also preserve the buffer against external spillovers amid heightened uncertainty and volatility emanating from financial sector distress in advanced economies,” Medalla added.
“Moving forward, the BSP reassures the public that monetary authorities remain ready to respond further to inflation risks in line with the BSP’s data-dependent approach to ensuring price and financial stability,” Medalla said. — Jimmy Calapati, Reuters
