The central bank’s Monetary Board has decided to hold the policy rate steady at 2.25 percent on Thursday after reducing the benchmark rate by a cumulative 175 basis points (bps) since February.
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno. (Bloomberg file photo)
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the benign inflation with downside risks until 2022, the uncertain and weak global economic growth outlook as well as the local economy in recession due to the COVID-19 pandemic – all these have influenced their decision to keep the rates unchanged.
“Given these considerations, the Monetary Board is of the view that monetary policy settings remain appropriate for the time being,” said Diokno. “A prudent pause will enable the cumulative 175 bps reduction in the policy rate as well as other monetary and regulatory relief measures by the BSP to fully work their way through the economy, even as the National Government continues to implement interventions to bolster economic activity and protect human lives and livelihoods.”
BSP Deputy Governor Francisco G. Dakila Jr., in the meantime, said the Monetary Board has a higher inflation forecast this year until 2022.
For 2020, the BSP revised its June 25 estimate of 2.3 percent to 2.6 percent and for 2021, the inflation forecast is also adjusted higher from 2.6 percent to three percent. For 2022, the estimate is now 3.1 percent from the previous three percent projection.
Dakila said the major factors for revising inflation forecasts are the higher inflation recently. “We note that the inflation in June (2.5 percent) and July (2.7 percent) was higher than our initial baseline projection although inflation outurn was well-within (BSP) forecast range,” he said.
Dakila also said that inflation forecasts were changed because of the higher fuel or oil prices. “On the other hand, these factors were partly offset by sharper than expected contraction in growth,” he added.
The domestic economy entered a pandemic-induced recession after the government reported a 16.5
percent GDP contraction for the second quarter, following another GDP reduction in the first three months of 2020.
Diokno said that while the latest baseline forecasts are higher “slightly” because of the higher-than-expected July inflation and increases in global crude oil prices, the inflation target is still safe at two-four percent.
“The balance of risks to the inflation outlook also leans toward the downside from 2020 until 2022 owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic. Meanwhile, inflation expectations remain broadly consistent with the inflation target,” said Diokno.
In deciding to keep rates steady at 2.25 percent for the overnight reverse repurchase facility, and 1.75 percent and 2.75 percent for overnight deposit and lending facilities, Diokno said the Monetary Board has noted the following: that the outlook for global economic growth remained subdued and uncertain amid a resurgence in COVID-19 cases in many jurisdictions; and the sharp contraction in domestic output in the first half of 2020, reflecting the impact of the enforcement of necessary measures to contain the spread of the virus in the country.
But, he added, “the Monetary Board observed early signs of recovery in domestic economic activity with the gradual easing of lockdown restrictions, supported by ample liquidity in the financial system.”