BSP holds key rate as inflation picks up

Published June 20, 2019, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

The central bank yesterday kept its benchmark overnight rate at 4.50 percent in a “pause” decision after easing interest rates and slashing reserve requirement ratio (RRR) last month.

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Bangko Sentral ng Pilipinas (BSP) Governor and Monetary Board chair Benjamin E. Diokno said they decided to maintain current rates because of continued manageable inflation outlook and a “firm domestic growth prospects support” that are “keeping monetary policy settings steady for the time being.”

“A prudent pause allows the BSP to observe and assess the impact of prior monetary adjustments including the phased reduction in the RRR to be completed by the end of July,” Diokno said Thursday after the Monetary Board’s fourth policy meeting this year.

BSP Deputy Governor Diwa C. Guinigundo said a pause from its previous easing stance is prudent because there is “a lot of uncertainty in the market (and) we don’t know how previous (decisions) will work itself through… and the easing (May 9 decision and RRR cuts) really serves as cushion against external uncertainties.”

Guinigundo said for 2019 and 2020, inflation forecasts were adjusted lower to 2.7 percent this year from its previous estimate of 2.9 percent (May 9), and for next year, to three percent from 3.1 percent previously.

For the first time, Guinigundo disclosed the BSP’s foreign exchange (FX) rate assumptions as one of two main factors for deciding on the inflation forecasts. He said this is for “transparency” and for “consistency” since these FX assumptions are also in the national budget assumptions.

For 2019, the BSP has an FX assumption of P52.01 and P51.50 for 2020. Last May 9, with the previous inflation forecasts, the exchange rate assumptions then were P52.06 for 2019 and P51.78 for 2020.

The other factor considered was the global oil prices which the BSP now assume at an average of $64.56 per barrel for 2019, and $61.35 for 2020, compared to previous assumptions of $68.90 and $67.10, respectively.

In deciding to pause, the BSP said inflation remains likely to settle within the target range of three-four percent this year. For the first five months, inflation has averaged at 3.6 percent.

“The Monetary Board noted that while real sector activity moderated in the first quarter of the year, overall domestic economic activity is likely to remain firm, supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure spending program,” said Diokno.

He said the risks to the inflation outlook are still broadly balanced for 2019 and 2020. “Weaker global economic prospects amid a possible easing in global demand and increased trade tensions continue to temper the inflation outlook.
The potential adverse effects of a prolonged El Niño episode remain a key upside risk to inflation,” the BSP chief said.