For the sixth policy meeting in a row, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) has again opted to keep the benchmark rate steady at two percent --- the lowest interest rate on record --- in support of a recovering but still fragile economy.
The BSP, however, raised the inflation forecasts for 2021 until 2023, to 4.1 percent for this year, and 3.1 percent for 2022 and 2023. The previous forecasts (June 24) was 4 percent for 2021, and 3 percent for the next two years.
BSP Governor Benjamin E. Diokno said Thursday, August 12, that they still see inflation expectations as being “firmly aligned with the baseline projection path” despite risks to the inflation outlook including the spread of the more contagious COVID-19 variant, the Delta strain, and “delays in the lifting of containment measures could further dampen prospects for global growth and domestic demand.”
“The Monetary Board (has) observed that the reimposition of quarantine measures to arrest the recent wave of COVID-19 infections could pose a risk to the ongoing economic recovery,” said Diokno, referring to the two-week stricter lockdown from August 6-20.
BSP Deputy Governor Francisco G. Dakila Jr., who announced the latest inflation forecasts, said they adjusted the forecasts because of the higher global commodity prices and the depreciation of the peso. They expect the average inflation to be in the upper band of the two-four percent for 2021 but these are still mostly due to supply-side pressures on meat and other food prices.
Dakila said inflation will ease closer to the midpoint of the two-four percent target band in 2022 and 2023.
“Inflation estimates are higher by 0.1 percentage point each compared to previous forecasts in June 24 (Monetary Board meeting) and factors that led to the revision in the baseline forecasts include higher global crude and non-oil prices, weakening of the peso and concerns about the speed of arrival of imported pork. (We also) taken into account the latest inflation outturn specifically in June and July,” said Dakila. July inflation of 4 percent was lower than June’s 4.1 percent, bringing the seven-month average to 4.4 percent, which was above the target for 2021 until 2023.
Dakila, citing commentaries from the International Monetary Fund, said global non-fuel prices have increased further as the world economy recovers from the pandemic – “however the path of the oil prices are expected to be moderate over the medium term.”
“Dubai crude oil prices have continued to increase compared to the previous policy meeting (and) again this is an offshoot of an expected recovery in global economic activity (but) upward adjustment is mostly on the short term and the pattern is for future prices to be moderating in 2022 and 2023,” noted Dakila.
He said that for now, based on the latest developments, the inflation path “takes us back to quite close to the midpoint of the inflation target in 2022 and 2023 (but) for 2021, there can be a very slight breach of the target but this is due to temporary supply side factors.”
During Thursday’s Monetary Board policy meeting, the BSP also left the interest rates on the overnight deposit and lending facilities unchanged at 1.5 percent and 2.5 percent, respectively.
“On balance, the Monetary Board is of the view that the expected path of inflation and downside risks to domestic economic growth warrant keeping monetary policy settings unchanged,” said Diokno, adding that they remain focused on sustaining monetary policy support “for as long as necessary in order for the momentum of economic recovery to gain more traction as well as to help boost domestic demand and market confidence, especially as risk aversion continues to temper credit activity.”