Inflation rate forecasts upgraded
The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) kept its policy rate at two percent during Thursday’s policy meeting but it raised its inflation rate forecasts for 2021 and 2022 due to rebounding oil prices as the world economy recovers.
This is the second policy meeting in a row where the Monetary Board did not move its benchmark rate. The last time the BSP changed its monetary policy setting was November 19, 2020 when it cut the key rate by 25 basis points.
BSP Governor Benjamin E. Diokno said the prevailing monetary policy settings “remain appropriate to support the government’s broader efforts to facilitate the recovery of the economy.”
Diokno also said the “timely" implementation of non-monetary interventions by the government is "crucial in mitigating the impact of supply-side pressures on inflation and thereby preventing them from spilling over as second-round effects.”
BSP Deputy Governor Francisco G. Dakila Jr. said in taking the latest market developments, they have increased the inflation average rate forecast for 2021 to 4.2 percent, up from its previous estimate of four percent they announced last February.
For 2022, the baseline inflation assumption was adjusted slightly to 2.8 percent from its previous 2.7 percent forecast.
Diokno said the BSP will continue to be watchful for signs of inflation “becoming broader based”. He said the BSP “is prepared to take immediate measures as appropriate to ensure that the monetary policy stance continues to support the BSP's price and financial stability objectives.”
For now, he said the interest rate on the BSP’s overnight reverse repurchase facility is still at two percent while the overnight deposit and lending facilities remain at 1.5 percent and 2.5 percent.
Both Diokno and Dakila reiterated that inflation rate would breach the upper band of the two-four percent target for 2021, mainly because of supply-side constraints or pressures on on domestic prices of meat and increasing international oil prices.
“Nevertheless, inflation is still seen to return within the target band in 2022 as supply-side influences subside,” said Diokno. He added that the balance of risks to the inflation outlook is still broadly balanced this year but leaning toward the downside in 2022.
“Tighter domestic supply of meat products and improved global economic activity could lend further upside pressures on inflation. However, the ongoing pandemic also continues to pose downside risks to the inflation outlook, as the recent surge in virus infections and challenges over mass vaccination programs continue to temper prospects for domestic demand,” said Diokno.
Dakila, in the meantime, said there are two factors for the revision of the 2021 and 2022 inflation forecasts, the first being the elevated February inflation of 4.7 percent versus January’s 4.2 percent. The rising inflation, he maintained, continue to be the result of transitory conditions from supply-side shocks on prices.
The other factor is the outlook for international oil prices which Dakila said has improved due to the global rollout of the COVID-19 vaccines beginning last December, 2020.
He said the BSP assumption for Dubai oil is adjusted lower to $51.37 per barrel this year from its previous (February) estimate of $54.65. For 2022, from the previous assumption of $51.98 per barrel, they now look at it $57.79. As the global economy recovers, so do oil prices and this will have an impact on inflation. Dakila said despite these revisions, their projection for inflation continue to be the same, that the inflation rate will decelerate below the midpoint of the target range in the first half but towards the fourth quarter this year and continuing on to the first quarter next year it will start to fall back before settling close to the midpoint by the second half of 2022.