Inflation forecasts raised

The Bangko Sentral ng Pilipinas (BSP) has decided to stick with the two percent benchmark rate to end 2020 but raised the inflation forecasts due to the increase in crude oil prices as prospects for global economic recovery got a boost from the release of COVID-19 vaccines.

BSP Governor Benjamin E. Diokno said that keeping the policy rate at current level is appropriate. “The Monetary Board believes that an accommodative monetary policy stance, together with sustained fiscal initiatives to ensure public welfare, should quicken the economy’s transition toward a sustainable recovery,” he said after Thursday’s monetary policy meeting, the BSP’s last policy setting decision for the year.

BSP Deputy Governor Francisco G. Dakila Jr. announced the new inflation forecast for 2020 which is higher at 2.6 percent from the previous 2.4 percent from the November 19 policy meeting. For next year, the projection is also adjusted but much more significantly higher at 3.2 percent from 2.7 percent previously. The BSP still sees 2.9 percent inflation average for 2022.

Dakila said the factors for deciding to raise inflation outlook was based on the assessment that global crude prices could remain on the high side. He also noted supply side pressures on the food front – “and that is something we see when we look at the November inflation outturn when contribution of food to inflation was almost double that compared to October.” The inflation rate in November increased to a 19-month high of 3.3 percent and even – on the rare times that this happened – broke the BSP’s monthly forecast of 2.4 percent to 3.2 percent.

“But it can (still) be noted that the baseline forecast remain comfortably within the inflation target band and so (the) outlook can be described as continuing to be benign,” said Dakila, despite the “sharp increase” in crude oil prices and the higher-than-expected November food inflation.

Diokno said however that “since the rise in food prices is transitory, it is expected that the future inflation path will remain firmly within the government’s two-four percent target over the policy horizon.”

He also said that the balance of risks to the inflation outlook “leans toward the downside from 2020 to 2022 owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic.”

In keeping the overnight reverse repurchase facility steady at two percent, as well as the interest rates on the overnight deposit and lending facilities 1.5 percent and 2.5 percent, respectively, Diokno said the Monetary Board also noted that the “resurgence of COVID-19 cases globally has tempered economic

activity with the reimposition of preventive measures in recent weeks.”

But the “optimism over the delivery of vaccines has lifted market confidence, supporting improved prospects for global growth.”

Diokno also said that the Monetary Board continue to see early signs of improving mobility and sentiment “while recent natural calamities could pose strong headwinds to growth” but that the “further easing of quarantine measures should help facilitate the recovery of the economy in the coming months.”

Last November 19 the Monetary Board cut the policy rate by 25 basis points (bps) in a surprised move, bringing the total interest rates reduction to 200 bps or by two percent.

The BSP has implemented a series of pandemic-induced aggressive policy rate cuts since February. The real interest rates, which is below the inflation level, is in the negative territory.

The inter-agency Development Budget Coordinating Committee has recently updated its macroeconomic assumptions such as an average inflation rate for 2020 of 2.4 percent to 2.6 percent, and two-four percent for 2021 and 2022.

The DBCC also adjusted the assumption for Dubai crude oil per barrel of $40-$42 for 2020 from the previous $35-$45. For 2021 and 2022, the earlier projection of $35 to $50 is maintained.

As for the peso-US dollar exchange rate assumption, the government has revised this to P48 to P50 for 2020 and P48 to P53 for 2021 and 2022.