As expected, the Bangko Sentral ng Pilipinas (BSP) maintained its two percent policy rate on Thursday, Dec. 16, during its 8th and last Monetary Board policy-setting meeting for the year, and raised the inflation forecasts for 2021 and 2022.

The interest rate on the BSP’s overnight reverse repurchase facility has remained steady at two percent since November 2020, while the rates on the overnight deposit and lending facilities were also unchanged at 1.5 percent and 2.5 percent, respectively, for 2021.

BSP Governor Benjamin E. Diokno said they increased the inflation forecasts due to the higher-than-expected November inflation of 4.2 percent which brought the year-to-date average to 4.5 percent, above the target of two-four percent.

Diokno said the Monetary Board still sees “enough scope to keep a patient hand on the BSP’s policy levers owing to a manageable inflation environment.”

“At the same time, downside risks to the economic recovery emanate from the emergence of new COVID-19 variants as well as the potential tightening of global financial conditions. Hence, preserving ongoing monetary policy support at this juncture shall help sustain the economy’s momentum over the next few quarters,” he added.

The BSP’s projected inflation path remains within the inflation target band over the policy horizon while average inflation is seen to settle close to the midpoint of the target range in 2023. “Inflation expectations also continue to be anchored to the target level,” said Diokno in an online press briefing after the Monetary Board meeting.

BSP Deputy Governor Francisco G. Dakila Jr., in the meantime, said the revised inflation forecast for 2021 is higher at 4.4 percent versus its previous estimate of 4.3 percent last Nov. 18.

For 2022, the BSP sees 3.4 percent inflation, also higher than the Nov. 18 forecast of 3.3 percent.

There was however no change in the baseline forecasts for 2023 which remains at 3.2 percent.

Dakila said the revision to the forecasts was mainly influenced by the higher November inflation number but estimates were offset by the decline in the global oil prices. He also said inflation drivers continue to come from the demand-side.

The risks to the inflation outlook are still more on the upside for 2022 while still broadly balanced for 2023.

“Upside risks are linked mainly to the potential impact of continuing constraints on the supply of key food items and petitions for transport fare hikes,” said Diokno. He said the strong global demand amid lingering supply-chain bottlenecks could also exert further upward pressures on international commodity prices.

The Monetary Board said new COVID-19 variants such as the Omicron could also pose downside risks to the outlook for growth and inflation.

“Nonetheless, the Monetary Board observed that economic growth now appears to be on firmer ground, supported by the government’s accelerated vaccination program and calibrated relaxation of quarantine protocols. In particular, credit activity has gradually recovered in recent months, reflecting improved business activity and market sentiment,” noted Diokno.

Dakila said the Monetary Board’s latest decision to keep rates steady has already taken into consideration the US Federal Reserve’s hawkish stance, especially in the inflation path projections.

He repeated what Diokno said earlier that the BSP has “always been primarily conditioned by domestic consideration” and most importantly, the outlook for inflation.

“We had not had to move with the Fed actions in the past (and) any volatility in the financial market including capital flows will be handled by our strong external position,” said Dakila, adding that the BSP’s first line of defence is its market-oriented exchange rate system.