Philippines: BSP expects inflation to breach 2021 target

• Mar 26, 2021

No changes in key rates

MANILA, Philippines — Monetary authorities decided to keep an accommodative stance to support the economy as inflation is now expected to breach the government’s two to four percent target for this year while the country continues to struggle to control the raging COVID-19 pandemic, the Bangko Sentral ng Pilipinas (BSP) said yesterday.

In a virtual press conference, BSP Governor Benjamin Diokno said the Monetary Board opted to maintain the interest rate on overnight reverse repurchase facility at an all-time low of two percent, overnight deposit facility at 1.5 percent and overnight lending facility at 2.5 percent due to the possibility that inflation may surpass the government’s target for this year.

“Inflation may breach the upper end of the target range of two to four percent in 2021, reflecting the impact of supply-side constraints on domestic prices of key food commodities such as meat as well as the continuing uptick in international oil prices,” Diokno said.

Nevertheless, the BSP chief said inflation may still return within the target band in 2022 as supply-side influences subside.

Diokno said tighter domestic supply of meat products and improved global economic activity could lend further upside pressures on inflation.

“However, the ongoing pandemic also continues to pose downside risks to the inflation outlook as the recent surge in virus infections and challenges over mass vaccination programs continue to temper prospects for domestic demand,” Diokno said.

Diokno also said the Monetary Board believes the prevailing monetary policy settings remain appropriate to support the government’s broader efforts to facilitate the recovery of the economy.

“At the same time, however, 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,” the BSP chief said.

Economic managers expect a recovery this year with a gross domestic product (GDP) growth of 6.5 to 7.5 percent.

BSP Deputy Governor Francisco Dakila Jr. said the Monetary Board raised anew its inflation forecast for 2021 to 4.2 percent from the original target of four percent and to 2.8 instead of 2.7 percent for 2022.

Inflation accelerated to a fresh two-year high of 4.7 percent in February from 4.2 percent in January on higher food prices particularly meat due to supply shortage brought about by the African swine fever (ASF) as well as rising oil prices.

Dakila said the inflation uptick over the past few months remain transitory in nature as inflation is seen decelerating back to the mid-point of the two to four percent target toward the fourth quarter   and continuing on to the first quarter of next year.

Dakila said the BSP raised its Dubai crude oil price forecast to $61.37 per barrel this year and $57.79 per barrel next year due to the expected global economic recovery, prompting monetary authorities to revise upward their inflation forecasts for this year.

As part of its COVID-19 response measures,the BSP slashed interest rates by 200 basis points, lowered the reserve requirement ratios, entered into a P300 billion repurchase agreement with the Bureau of the Treasury, extended a P540 billion provisional advance to the national government and purchase government securities in the secondary market.

Dakila said the aggressive easing has helped reduce the average interbank loan rate by 229 basis points, the 91-day Treasury bill rate by 195 basis points and the average bank lending rate by 160 basis points since January last year.

“While there has been an adjustment in market interest rates because of the prevailing uncertainty in the economy and in the outlook, what we’ve seen is that there has been a much longer lag in the transmission of this to credit activity,” Dakila said.

Dakila said banks are still reluctant to lend, while businesses and individuals are reluctant to borrow from financial institutions.

ING Bank senior economist Nicholas Mapa said he expect the Monetary Board to keep policy rates unchanged in the near term as the BSP is willing to look past the supply side-induced price spike for now to maintain economic support.

“BSP may only consider a possible rate hike should inflation remain stubbornly high, which could dis anchor inflation expectations and spark second round effects such as wage and transport fare adjustments.  With BSP on hold, we expect peso to remain stable in the near term as corporate dollar demand stays soft given fading economic output,” Mapa said.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the movement in the local key policy rates in the coming months would still be a function of the trend in inflation as well as inflation expectations.

“The more stringent quarantine restrictions from March 22 to April 4 amid new record high new COVID-19  cases, although technically not a lockdown, could slowdown demand conditions and overall economic recovery prospects, which could somewhat help ease inflationary pressures as seen in recent months,” Ricafort said.

Source: https://www.philstar.com/business/2021/03/26/2086978/bsp-expects-inflation-breach-2021-target