The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, maintained on Thursday the benchmark interest rate at 6.25 percent, calling it a “prudent pause” that took into account the recent downward trajectory of inflation.
Inflation hit 8.7 percent in January before easing to 8.6 percent in February, 7.6 percent in March and 6.6 percent in April.
BSP Governor and MB chairman Felipe Medalla said in a briefing after the policy meeting that the interest rates on the overnight deposit and lending facilities were kept at 5.75 percent and 6.75 percent, respectively.
“Based on the sum of new information and its assessment of the impact of previous monetary policy actions, the Monetary Board decided that a pause in monetary policy tightening was appropriate. The BSP’s latest baseline projections continue to reflect a gradual return of inflation to the target band of 2 to 4 percent over the policy horizon,” Medalla said.
He said the average inflation for 2023 was projected to settle at 5.5 percent, lower than 6.0 percent previously, while the average inflation forecast for 2024 fell slightly to 2.8 percent. Meanwhile, inflation expectations for 2024 and 2025 are steady and within the target range.
“The Monetary Board also noted that while GDP growth has remained robust in the first quarter of 2023, demand indicators have also pointed to a potential moderation in the recent months, suggesting that previous policy rate increases by the BSP continue to work their way through the economy,” he said.
Medalla said the Monetary Board was encouraged by the recent mounting of whole-of-government actions to ease constraints on food supply.
He said even as headline inflation continued to decelerate with slower increases in the prices of food and energy-related items, core inflation only eased marginally.
The balance of risks to the inflation outlook remains largely tilted towards the upside owing to persistent constraints in the supply of key food items, the potential impact of El Niño on food prices and utility rates and the effects of possible additional adjustments in transportation fares and wages.
Meanwhile, the impact of a weaker-than-expected global economic recovery continues to be the primary downside risk to the outlook.
“Given these considerations, the Monetary Board deems it prudent for the BSP to take a pause in monetary policy tightening while remaining ready to respond to emerging threats to inflation. The Monetary Board also deems it necessary to keep the policy interest rate at its current level over the near term, as ongoing price pressures continue to warrant close monitoring,” Medalla said.
“A prudent pause also allows monetary authorities to further assess how macroeconomic and financial conditions will evolve in view of tighter global financial conditions,” he said.
He said moving forward, the BSP would continue to monitor developments affecting the outlook for inflation and growth.
He said the BSP remained ready to resume monetary tightening as necessitated by emerging data, consistent with its primary mandate to promote price and financial stability.
When asked if there would be another rate hike this year, Medalla said it would depend on the trajectory of inflation.
“We are unlikely to raise but reluctant to cut… The possible scenario would be a pause for two or three meetings,” he said, adding that a new “shock” or much higher inflationary expectations might trigger rate hikes.
Medalla also said the possibility of cutting the reserve requirement, which is the highest in the region, remained on the table.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said markets were expecting a possible cut in reserve requirement as early as June 2023 as one of the options to ease monetary policy other than a local policy rate cut.
The BSP hiked the policy rate by a cumulative 425 basis points to 6.25 percent since 2022.