The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday retained the overnight borrowing rate at a record low of 2 percent to continue supporting economic recovery amid the pandemic.
It was the eighth straight monetary policy meeting where the policy rate was kept at 2 percent since Nov. 19, 2020.
Bangko Sentral Governor Benjamin Diokno, who is also the board chairman, said in an online briefing following the board meeting the MB also retained the interest rates on the overnight deposit and lending facilities at 1.5 percent and 2.5 percent, respectively.
“Latest baseline forecasts are broadly unchanged from the previous assessment round. Average inflation is seen to slightly exceed the upper end of the target band of 2 to 4 percent in 2021,” Diokno said.
“Meanwhile, inflation is projected to settle close to the midpoint of the target range in 2022 and 2023, as the recent rise in global crude oil prices, the stronger recovery in domestic economic activity and the slight depreciation of the peso were mostly offset by the lower-than-expected inflation outturns in recent months. Inflation expectations have also remained firmly anchored to the baseline projection path,” he said.
He said the risks to the inflation outlook shifted towards the upside for 2022 even as they remained broadly balanced for 2023. Upside risks are mainly linked to the potential impact of weather disturbances on the prices of key food items, petitions for transport fare hikes and the possibility of a prolonged recovery of domestic pork supply.
He said the strong global demand amid persistent supply-chain bottlenecks could also exert further upward pressures on international commodity prices. The uncertainties in food supply require determined reforms to improve farm productivity and competitiveness, he said.
“Meanwhile, potential delays in the lifting of domestic containment measures, as well as the emergence of more virulent COVID-19 variants, could dampen prospects for both global and domestic demand and thus temper inflationary pressures,” he said.
The Monetary Board also observed that economic growth appeared to be gaining solid traction, driven by improved mobility and sentiment amid the calibrated relaxation of quarantine protocols and continued progress in the government’s vaccination program.
“The Monetary Board noted that sustained measures to safeguard public health and welfare remain crucial to facilitate the recovery in investment and employment,” he said.
Diokno said the sum of new data suggested that there remained scope to hold monetary policy settings steady amid a manageable inflation environment. “The Monetary Board maintains that keeping a patient hand on the BSP’s policy levers, along with appropriate fiscal and health interventions, will keep the economic recovery more sustainable over the next few quarters,” he said.
Diokno said the BSP would continue to prioritize providing policy support for the economy while keeping an eye on the potential risks to future inflation. He said the BSP was ready to respond to potential second-round effects arising from supply-side pressures, in line with its price and financial stability objectives.
Deputy Governor Francisco Dakila said in the same briefing the board reduced the inflation forecast this year to 4.3 percent from 4.4 percent in the previous meeting, taking into account the lower inflation rate in September and October 2021. For 2022 and 2023, the inflation forecasts were unchanged at 3.3 percent and 3.2 percent, respectively.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said the continuation of accommodative monetary policy is a major pillar for the economic recovery program from COVID-19 because it helps in keeping short-term borrowing/financing costs relatively lower that spurs greater demand for loans. This, in turn, helps in stimulating more investments as well as job creations.
Ricafort said any rate hike by the US Federal Reserve, especially starting 2022, “could lead to further normalization of monetary policy, which could lead to corresponding rate hikes by other central banks around the world that usually follow any Fed rate hikes to also maintain healthy interest rate differentials and better manage the economic recovery that could be fundamentally be accompanied by some pickup in demand and in inflation as well.”
Inflation eased to 4.6 percent in October on lower annual increases in food prices.
Dakila said the board also took into consideration the GDP growth of 7.1 percent in the third quarter, which was a significant turnaround from the 11.6-percent decline a year ago that was pulled down by the devastating impact of the COVID-19 pandemic.
“There are prospects that inflation will go back to the target [range of 2 to 4 percent] as early as November 2021, barring any unforeseen shocks from oil prices, for example,” he said.
Dakila said inflation could further ease to below the midpoint of the target range in the first quarter of 2022 o base effects and this would come at a time that there is moderation in global oil prices.
“This path is a validation of Monetary Board’s assessment that inflation is driven by supply side factors and best addressed by non-monetary measures,” Dakila said.