BSP sees below 2% inflation in December, January

Published October 29, 2020, 6:22 PM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) is projecting the inflation rate to fall below the two-percent level for the last month of December extending up to January next year, but it is no reason to start adjusting interest rates.

BSP Deputy Governor Francisco G. Dakila Jr. explained that inflation below two percent vis-a-vis a two-four percent target is only temporary.

He noted that the month-on-month inflation in December 2019 and January 2020 was at 0.7 percent and 0.6 percent, respectively. Inflation climbed to 2.9 percent in January from 2.5 percent in December.
“This is something that is really very temporary. It is not something that should be of major basis for setting a monetary policy,” said Dakila during the BSP’s virtual inflation briefing for the third quarter.

The BSP official said that based on their monthly projections, it is possible that inflation will drop to below the low-end of the target range or pierce the two-percent level but it should be emphasized, he added, that this is “purely due to base effects.”

“What’s more important is that for 2021, the baseline projection now stands at 2.8 percent (from three percent) and this is very much within the inflation target range. Likewise, the 2022 baseline forecast is actually three percent which is exactly at the midpoint of the target, and so you can see the trajectory for inflation to move closer to the midpoint of the target as we go forward in the policy horizon. This also reflects the expected recovery in demand as the economy likewise recovers in 2021 and 2022,” explained Dakila.

During the Monetary Board’s October 1 monetary policy rate where the benchmark rate was left unchanged, the BSP revised the 2020 inflation forecast lower to 2.3 percent from its previous projection of 2.6 percent. The inflation forecasts for 2021 and 2022 were also reduced to 2.8 percent and three percent from earlier estimates of three percent and 3.1 percent, respectively. The forecasts were changed because of lower prices of oil and selected goods, as well as the impact of the lower-than-expected inflation rate for August of 2.4 percent versus July’s 2.7 percent.

BSP Governor Benjamin E. Diokno, in his opening statement at the start of the online inflation briefing, said that the BSP’s accommodative monetary policy stance in the third quarter continue to “ensure that borrowing costs remain low and credit conditions supportive.” The BSP has reduced the policy interest rate by 175 basis points from February to its lowest rate of 2.25 percent.

“More importantly, the BSP has been able to maintain its accommodative stance largely because of the ample policy room afforded by a benign inflation environment and well-anchored inflation expectations,” he said. Inflation in the third quarter was up at 2.5 percent from 2.3 percent in the second quarter and from 1.7 percent same time in 2019.

Diokno reiterated that the overall balance of risks to the BSP’s inflation outlook “remains tilted to the downside for 2020 through 2022, as uncertainty surrounding the pandemic continues to dampen demand and prospects for a strong and immediate recovery.”

“Amid a benign inflation environment and stable domestic liquidity conditions, the BSP found it appropriate to take a prudent pause from monetary easing and allow prior actions to continue to work their way through the economy. At the moment, monetary policy settings are sufficiently accommodative to mitigate the strong downside risks to growth,” said Diokno.

 
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