BSP keeps key rate steady at 2%

Published November 18, 2021, 4:25 PM

by Lee C. Chipongian

The central bank’s Monetary Board has again decided to keep its two-percent benchmark rate unchanged during Thursday’s (Nov. 18) policy meeting and likely to remain on hold until the second half of 2022 to ensure economic growth momentum. This policy rate has been steady and unchanged since November 2020.

Bangko Sentral ng Pilipinas (BSP) officials also said it is possible to see the November inflation to fall within the two-four percent target after breaching the four-percent level in January this year.

BSP Governor Benjamin E. Diokno said economic growth is “gaining solid traction” with improved mobility with the easing of quarantine restrictions and faster vaccination rollout. “On balance, the sum of new data suggests that there remains scope to hold monetary policy settings steady amid a manageable inflation environment (which should) keep the economic recovery more sustainable over the next few quarters,” he said.

BSP Deputy Governor Francisco G. Dakila Jr. said their inflation outlook has improved and a below four-percent rate could happen as early as this month.

“There are prospects that inflation can go back to within target even earlier. It can be as early as November barring any unforseen shocks coming from oil, for example,” said Dakila in an online press briefing after the Monetary Board meeting.

Inflation is expected to continue to decelerate in the next few months. “It’s possible inflation can (decelerate) to below the midpoint in the first quarter 2022 due to negative base effects and this will come about (due to the) moderation in both global oil and non-oil prices,” he added.

The BSP has lowered its 2021 inflation forecast to an average 4.3 percent for 2021 from its earlier estimate (Sept. 23) of 4.4 percent, but opted to maintain the 2022 and 2023 previous forecasts of 3.3 percent and 3.2 percent, respectively. This year’s inflation estimate is above the target of two-four percent.

Dakila said they revised downward the 2021 inflation outlook despite the increase in global crude oil prices and the stronger GDP numbers for the third quarter. “Basically, the impact of these two factors on the upward side (of inflation) has been tempered by the lower-than-expected inflation in September and October,” he said. The rate in October declined to 4.6 percent and September inflation eased to 4.8 percent from August’s 4.9 percent. Stable prices of meat and fish eased inflation pressures in October.

With the BSP’s overnight reverse repurchase facility still at two percent, the interest rates on the overnight deposit and lending facilities were also kept at 1.5 percent and 2.5 percent, respectively.

Diokno said Thursday that while the average inflation may still slightly exceed the target this year, it is seen to settle close to the midpoint of the target range in 2022 and 2023 as “the recent rise in global crude oil prices, the stronger recovery in domestic economic activity, and the slight depreciation of the peso were mostly offset by the lower-than-expected inflation outturns in recent months.”

Inflation expectations are firmly anchored but risks to the outlook have shifted more to the upside for 2022 even as they remain broadly balanced for 2023.

“Upside risks are mainly linked to the potential impact of weather disturbances on the prices of key food items, petitions for transport fare hikes, and the possibility of a prolonged recovery of domestic pork supply,” said Diokno, while “strong global demand amid persistent supply-chain bottlenecks could also exert further upward pressures on international commodity prices.”

He also said that the uncertainties in food supply “require determined reforms to improve farm productivity and competitiveness.”

“Meanwhile, potential delays in the lifting of domestic containment measures, as well as the emergence of more virulent COVID-19 variants, could dampen prospects for both global and domestic demand and thus temper inflationary pressures,” added Diokno.