BSP holds policy rate at record low

PHILIPPINE STAR/ MICHAEL VARCAS

By Luz Wendy T. Noble, Reporter

THE Philippine central bank left its key interest rate unchanged at a record low on Thursday, as it supports an economy whose recovery is at risk from a renewed surge in coronavirus disease 2019 (COVID-19) infections.

The Monetary Board kept the overnight reverse repurchase rate at an all-time low of 2% for a third consecutive meeting, as predicted by 19 economists in a BusinessWorld poll last week. Rates for the overnight lending and deposit facilities were also maintained at 2.5% and 1.5%, respectively.

The government tightened some restrictions in Metro Manila and nearby provinces until April 4 in hopes of curbing the rising number of COVID-19 cases. As of Thursday, the Health department reported 8,773 new infections, with active cases nearing 100,000.

“The Monetary Board is of the view that prevailing monetary policy settings remain appropriate to support the government’s broader efforts to facilitate the recovery of the economy,” BSP Governor Benjamin E. Diokno said at an online briefing on Thursday.

The central bank kept policy settings steady since its December meeting, but Mr. Diokno hinted that they will respond accordingly when the need arises.

“The BSP is prepared to take immediate measures as appropriate to ensure that the monetary policy stance continues to support the BSP’s price and financial stability objectives,” Mr. Diokno said, stressing they will remain watchful for signs of a broader-based inflation.

Despite the recent spike, Mr. Diokno said the risk to the inflation outlook “appears to be broadly balanced” this year, and “leaning toward the downside in 2022.”

However, the BSP chief said further upside risks may emanate from tight domestic supply of meat products and pickup in global economic activity.

Downside risks come from the prolonged pandemic, the surge in COVID-19 cases, and challenges to the government’s mass vaccination program, Mr. Diokno added.

Headline inflation reached 4.7% in February, the highest since the 5.1% in December 2018.

“The Monetary Board emphasizes that 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,” Mr. Diokno said.

QUICKER INFLATION
Meanwhile, the central bank upwardly revised its inflation outlook to 4.2% this year, from the earlier forecast of 4% given in February. The average print for 2022 is seen at 2.8%, slightly higher than the previous projection of 2.7%, according to BSP Deputy Governor Francisco G. Dakila, Jr.

He said the February inflation print and the continued increase in global oil prices due to demand recovery were major factors to the inflation forecasts.

But Mr. Dakila stressed they still view the inflation uptick as “transitory” as it is mainly due to low supply.

“We are actually seeing that the inflation path will decelerate below the midpoint of the [2-4%] target range towards the fourth quarter of this year and continuing on to the first quarter of next year before settling close to the midpoint by the second half of next year,” Mr. Dakila.

Meanwhile, he said the BSP also raised its average Dubai crude oil price forecast to $61.37 per barrel (from $54.65 per barrel) this year, and to $57.79 per barrel (from $51.98) in 2022.

“As the global economy recovers, then oil prices will also recover and this has an impact on inflation,” Mr. Dakila said.

Despite the higher inflation outlook, Mr. Dakila said it remains necessary for the central bank to maintain its accommodative stance to support recovery. He added that supply-side factors should not trigger an “earlier-than-planned” exit from policy measures as this kind of inflation is better addressed by non-monetary actions.

“It is important that while the economic recovery is still in its nascent stage, then the monetary policy stance should continue to be supportive of the economy until such time that the recovery becomes fully self-sustaining,” he said.

ANZ Research Chief Economist Sanjay Mathur and analyst Rini Sen in a note said that while the BSP kept policy rates steady, its tone has become “more cautious on the underlying inflationary impulse.”

“We concur and do not expect any further rate action in 2021,” they said.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the central bank may likely keep the rate settings in the near term, which could provide support to the peso’s stability.

“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,” Mr. Mapa said.