The Monetary Board of the Bangko Sentral ng Pilipinas on Thursday kept the benchmark interest rate at 6.25 percent as expected on signs of slowing inflation.
The interest rates on the overnight deposit and lending facilities were also retained at 5.75 percent and 6.75 percent, respectively.
BSP Governor and MB chairman Felipe Medalla said the latest baseline projections continued to suggest a gradual return of inflation to the target band of 2 percent to 4 percent over the policy horizon.
“Average inflation for 2023 is projected to settle at 5.4 percent, slightly lower than 5.5 percent previously, while the average inflation forecast for 2024 now stands at 2.9 percent from 2.8 percent. For 2025, inflation is expected to average at 3.2 percent,” Medalla said.
Inflation expectations for 2023 were adjusted lower, while those for 2024 and 2025 appeared to have settled firmly within the target range, the BSP said.
Inflation, which hit a peak of 8.7 percent in January 2023, eased to 8.6 percent in February, 7.6 percent in March, 6.6 percent in April and 6.1 percent in May. This brought the average in the first five months to 7.5 percent, above the target range of 2 percent to 4 percent.
Both headline and core inflation decelerated further in May on slower increases in the prices of food and energy-related items, affirming expectations of a return to the target range by yearend.
Medalla said, however, the balance of risks to the inflation outlook continued to lean towards the upside because of the potential impact of additional transport fare increases and minimum wage adjustments, persistent supply constraints of key food items, El Niño weather conditions and possible knock-on effects of higher toll rates on agricultural prices.
Meanwhile, the impact of a weaker-than-expected global economic recovery remained the primary downside risk to the outlook.
“While the domestic growth momentum is expected to remain intact over the near term, recent demand indicators suggest a likely moderation in economic activity over the policy horizon, reflecting the impact of the BSP’s cumulative policy rate adjustments as well as weak global growth prospects,” Medalla said.
“Given these considerations, the Monetary Board deems it appropriate to maintain current monetary policy settings to allow the BSP to further assess how inflation and domestic demand have responded to tighter monetary conditions,” he said.
He said the lingering upside risks to the inflation outlook also warranted continued vigilance against potential second-round effects.
“Going forward, the BSP remains prepared to resume monetary tightening as necessary, in line with its data-dependent approach to ensuring price and financial stability,” he said.
BSP Deputy Governor Francisco Dakila Jr. said the slight downward revision of the inflation forecast this year from 5.5 percent made during the May policy meeting to 5.4 percent considered the lower-than-expected inflation of 6.1 percent in May. Dakila said the downward trajectory of inflation might also continue in June.
“The stronger economic activities and demand prospects are stronger than what we had assessed during the May policy meeting… That will have some impact on prices. Although the adjustment is minimal, the new baseline number is below the midpoint of the inflation target [range],” Dakila said.
Medalla said there should be at least two months of successive inflation rate below 4 percent, “before considering cutting [the interest rates]. Because cutting, when we should not, is a more serious error.”
Oxford Economics said it was maintaining its view that the central bank would keep the rate at the current level this year, before cutting it starting the first quarter of 2024.
“Declining inflation, stable interest rate differential and narrower current account deficit suggest that a cut, rather than a hike, is appropriate after a pause,” the London-based think tank said.
Rizal Commercial Banking Corp. chief economist Michael Ricafort said the expected easing trend in year-on-year inflation for the coming months to about 5 percent levels in June 2023; 4 percent levels from July to September 2023 and 3 percent levels from October to December 2023; and, 2 percent levels or even lower in the first quarter next year could fundamentally support any future pause or cut in policy rates.
Ricafort this might happen “especially if the Fed starts cutting rates, in view of the need to maintain comfortable interest rate differentials that are relatively tight already in recent months.”
“The timeliness and size of any future local policy rate moves [hike, pause, or cut] would also be a function of the behavior of peso exchange rate, given its impact on import prices and overall inflation. So if the peso exchange rate is relatively stable, any future local policy rate adjustments would just match any future Fed rate moves in the coming months,” he said.