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Philippines: BSP keeps rates on hold
But warns of breach in inflation targets
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has kept interest rates at record lows despite growing pressure to raise them, signalling it can pursue monetary action if inflation spirals upward in the coming months.
BSP Governor Benjamin Diokno yesterday said the policy-setting Monetary Board decided to maintain the interest rate for the overnight reverse repurchase facility at an all-time low of two percent.
Diokno said interest rates for the overnight deposit and lending facilities were likewise retained at 1.5 percent and 2.5 percent, respectively.
However, BSP Deputy Governor Francisco Dakila Jr. said the central bank now expects inflation to hit 4.3 percent from 3.7 percent this year, and up to 3.6 percent from 3.3 percent for 2023. As such, inflation expectation for 2022 could breach the two to four percent target range set by the government.
Dakila said the BSP adjusted its inflation outlook for this year and 2023 due to uncertainties in the crude market brought about by Russia’s invasion of Ukraine. The central bank raised its oil price forecast to $102.23 per barrel from $83.33 for this year and to $88.21 per barrel from $75.69, for 2023.
“The main driver for the revision in our forecast is the sharp increase in global crude oil prices, and this has also induced higher global oil prices,” Dakila said.
Diokno said the BSP supports the rollout of social protection measures that would mitigate the impact of price hikes, especially to the poorest families.
In the event that inflation runs away, Diokno committed that the BSP would carry out the necessary actions, including a rate hike, to contain the spike in commodity prices.
“The BSP is prepared to act as necessary should we see stronger indications of second round effects, such as when there are already broad-based price pressures and inflation expectations become disanchored. And as always, our decisions on monetary policy stance going forward will continue to depend on data,” the BSP chief said.
Alex Holmes, Asia economist of Capital Economics, said inflation could hit a high of five percent in the second quarter, but added that this would return to within the target band by the second half. In turn, he countered market consensus that the BSP may raise interest rates by 50 basis points this year.
“We expect inflation to peak at five percent in second quarter, [but] this should prove temporary and we expect it to drop back to within the central bank’s two to four percent target range by the end of the year,” Holmes said.
“As such, we doubt [that] rising inflation will force the BSP to hike, with the bank instead likely to leave rates on hold all year,” he said.
Rizal Commercial Banking Corp. chief economist Michael Ricafort advised the BSP to look into the second round impact of the oil price surges, such as on transport fare hikes and minimum wage increases, and on commodity prices.
For the year, fuel rates per liter have gone up by P14.90 for gasoline, P19.20 for diesel, and P16.35 for kerosene as of March 22. As an emergency measure, President Duterte ordered the release of fuel subsidies for PUV drivers, fuel discounts for farmers and fishermen, and cash transfer for the poorest families.
In case inflation swells beyond control, the BSP can raise interest rates to push borrowing costs up. As a result, demand for big-ticket items will decline and temper inflationary pressures.
Source: https://www.philstar.com/business/2022/03/25/2169645/bsp-keeps-rates-hold