The Bangko Sentral ng Pilipinas on Thursday kept the overnight borrowing rate steady at 6.25 percent amid the continued slowdown in inflation.
It also retained the overnight deposit and lending facilities at 5.75 percent and 6.75 percent, respectively.
BSP Governor Eli Remolona said the decision considered the lackluster 4.3-percent gross domestic product growth in the second quarter, which brought the first-half expansion to 5.3 percent, below the 6 percent to 7 percent target range for the year.
“The Monetary Board also recognized the challenging outlook for economic growth, as the weaker GDP outturn for the second quarter of 2023 reflected a broad-based slowdown in domestic demand. Household consumption slowed due to elevated commodity prices, while government spending contracted relative to the previous year,” Remolona said.
“Given these considerations, the Monetary Board deemed it appropriate to maintain monetary policy settings to allow a moderation of inflation even as authorities continue to assess the emerging risks to the inflation outlook,” he said.
Data showed that from a peak of 8.7 percent in January 2023, inflation eased to 8.6 percent in February, 7.6 percent in March, 6.6 percent in April, 6.1 percent in May, 5.4 percent in June and to a 16-month low of 4.7 percent in July 2023.
The BSP raised the policy rate by a total of 425 basis points to 6.25 percent from May 2022 until March 2023, before taking a prudent pause in the last three Monetary Board meetings.
Remolona said the latest baseline projections continued to show a return to inflation target in the fourth quarter despite a generally higher path for inflation relative to the previous forecast from the monetary policy meeting in June, reflecting mainly the impact of higher international oil prices.
Oxford Economics, an international research agency, expects the BSP to maintain its pause throughout the year before beginning rate cuts in the first quarter of 2024. “We believe recent inflationary pressures are mainly supply-driven and unlikely to be sustained. But further upside risks to inflation include potential nationwide minimum wage hike, which could invite demand-pull inflationary forces,” it said.
The BSP now sees average inflation in 2023 to reach 5.6 percent, while the average inflation forecasts for 2024 and 2025 now stand at 3.3 percent and 3.4 percent, respectively.
Inflation expectations for 2023 remained steady, while those for 2024 and 2025 declined slightly.
“Nonetheless, the balance of risks to the inflation forecast continues to lean towards the upside. Potential price pressures are linked to the impact of possible higher transport charges; higher minimum wage adjustments; persistent supply constraints on key food items; and the effects of El Niño weather conditions on food prices and power rates,” Remolona said.
Meanwhile, a weaker-than-expected global economic recovery remains the primary downside risk to the inflation outlook.
Authorities said the strength of economic activity going forward would likely moderate as pent-up demand wanes and the full impact of prior monetary policy tightening continues to manifest.
Fiscal impulse through programmed spending could support the growth momentum, they said. The fiscal authorities are now pushing agencies to ramp up spending to fulfill the 2023 public expenditure program. Sustained non-monetary measures remain crucial in addressing lingering supply-side pressures on prices.
Remolona said the BSP remained prepared to respond as necessary to safeguard the inflation target, in keeping with its primary mandate to ensure price stability.
He said earlier large supply shocks on inflation might compel the BSP to again raise the interest rates going forward. In an interview with Nomura research analyst Euben Paracuelles, Remolona said the country was not yet “out of the woods,” meaning risks remained that could impact the economy as well as the trajectory of inflation going forward.