Key rates steady

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    Even if inflation forecasts have shifted higher, the policymaking Monetary Board yesterday decided to maintain the key rates of the Bangko Sentral ng Pilipinas, stressing the current policy stance remains appropriate.

    The interest rate on the BSP’s overnight reverse repurchase facility stays 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.

    Benjamin Diokno, BSP governor and head of the Monetary Board, said while inflation is likely to “breach the upper end of the target range of 2 to 4 percent in 2021,” inflation is still seen “to return within the target band in 2022 as supply-side influences subside.”

    “(The breach) reflects the impact of supply-side constraints on domestic prices of key food commodities such as meat as well as the continuing uptick in international oil prices,” Diokno said.

    “The balance of risks to the inflation outlook remains broadly balanced around the baseline path in 2021 while leaning toward the downside in 2022. Tighter domestic supply of meat products and improved global economic activity could lend further upside pressures on inflation,” Diokno said.

    Francisco Dakila, BSP deputy governor, said the Board has also revised higher the inflation assumption for the next policy horizon.

    For 2021, from the earlier forecast of 4 percent, inflation is now seen to average to 4.2 percent. For the next year, inflation will likely average to 2.8 percent from the earlier forecast of 2.7 percent.

    The central bank has set an inflation target range of between 2 and 4 percent for this year.

    Dakila said main factors that led to revision are the elevated inflation outturn in February and the outlook for international oil prices as vaccines are rolled out.

    Inflation last month reached reached 4.7 percent, the fastest in two years, due to supply side shocks on prices of major commodities.

    Oil prices, meanwhile, are expected to reach $61 per barrel, from the previous assumption of $54, as global economies begin to recover.

    “Inflation will remain above the top end of the target range until the 3rd quarter this year. But this is transitory. As of now, there are still no evidence of second-round effects,” Dakila said.

    Nicholas Mapa, ING Bank Philippines senior economist, said they expect BSP to “keep policy rates unchanged in the near term.”

    “BSP may only consider a possible rate hike should inflation remain stubbornly high, which could disanchor inflation expectations and spark second round effects such as wage and transport fare adjustments,” Mapa said.

    Mapa said BSP “kept rates unchanged even as inflation accelerated, citing the need to support the economic recovery.”

    “The BSP Governor hinted at retaining monetary support for as long as the economy would need it, suggesting that the previously mentioned ‘long pause’ would be in effect for a little longer. Diokno also indicated that monetary authorities were carefully crafting an exit strategy from its current liquidity support program while also qualifying that it was not time to pull the plug on monetary stimulus,” Mapa said.

    But Mapa noted despite substantial rate cuts and liquidity support, “bank lending has crashed into negative territory given weak demand from both corporates and households given the recession, suggesting that last year’s easing efforts have yet to take root.”

    “With the economy in recession and a spike in COVID-19 cases resulting in a two-week partial lockdown, Diokno opted to accommodate the current price spike while indicating that supply side remedies, such as increased pork importation, would be more effective in stabilizing meat prices. Diokno remains confident that prices pressure will gradually fade with inflation decelerating in the second half but he did concede that the average inflation rate for the year could settle above target at 4.2 percent.” Mapa said.

    “It should not really trigger an earlier than planned exit of stimulus. What’s important is that the timely implementation of non-monetary measures will bring inflation back to target,” Dakila said, stressing that the stance “should continue to be supportive of the economy until such time that the recovery is certain.”

    Diokno said the prevailing monetary policy settings “remain appropriate to support the government’s broader efforts to facilitate the recovery of the economy.”

    “At the same time, however, the Monetary Board emphasizes the timely implementation of non-monetary interventions is crucial in mitigating the impact of supply-side pressures on inflation and thereby preventing them from spilling over as second-round effects,” Diokno said.

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