The Bangko Sentral ng Pilipinas’s (BSP) Monetary Board kept the benchmark overnight reverse repurchase (RRP) rate at two percent during its monetary policy meeting on Thursday, March 24, in favor of a recovering economy.
The policy rate has been on-hold at two percent for the last 16 months or since November 2020 to “safeguard the momentum of economic recovery amid increased uncertainty,” said BSP Governor Benjamin E. Diokno. Despite potential buildup in inflation pressures in the coming months, he said the BSP rate could stay unchanged for now “even as (the Monetary Board) continues to develop its plans for the gradual normalization of its extraordinary liquidity measures.”
However, as a form of policy action, Diokno said they may reduce the reserve requirement ratio (RRR) by the second half of this year, in time for an expected GDP higher growth.
“The cut in the reserve requirement ratio is in the agenda and we might do so in the second half of the year,” he said in online press briefing after the monetary policy meeting.
The BSP’s primary monetary policy instrument is the interest rate on its RRP facility. But BSP has the option to reduce banks’ RRR and its weekly auctions for the term deposit facility and the BSP securities facility. Without declaring it, the BSP will normalize monetary policy via the RRR cut.
The main objective of these monetary operations is to control and manage inflation which the BSP as of March 24 forecasts will average at 4.3 percent for 2022, higher than its February 17 estimate of 3.7 percent. For 2023, the BSP forecasts a higher inflation rate of 3.6 percent from its previous projection of 3.3 percent.
BSP Deputy Governor Francisco G. Dakila Jr. said the BSP revised the 2022 and 2023 inflation forecasts due to higher assumptions of Dubai crude prices. From a previous assumption of $83.33 per barrel average last February 17, they now see $102.23 per barrel. They also raised the 2023 crude price assumption to $88.21 per barrel from the previous $75.59.
“While sustaining the economic recovery remains a priority, the BSP stands ready to move should potential second round effects arise from elevated inflation pressures,” Diokno told reporters. “At the moment, we continue to see scope for maintaining our policy settings to allow the economic recovery to fully gain traction. Our latest assessment of recent economic data still suggest that economic growth is likely to return to pre-pandemic trajectory by the second half of 2022,” he added.
Diokno said the BSP is “keenly aware that inflation is likely to remain elevated in the coming months due mainly to domestic and global supply side pressures. Under these circumstances, it is still best to address these inflationary pressures through direct, non-monetary intervention.”
“The BSP is prepared to act as necessary should we see stronger indications of second-round effects such as when there are already broad-based price pressures and inflation expectations become disanchored,” he said.
The BSP’s inflation forecasts took into consideration its projection that the economy will likely achieve its pre-pandemic growth of six percent to seven percent in the second quarter 2022. Previously, Diokno said a pre-COVID GDP may be seen by the third quarter this year. “Given the potential broadening of price pressures over the near term, the BSP stands ready to respond to the buildup in inflation pressures that can disanchor inflation expectations,” he said.
Diokno reiterated that they have the space and the tookits to remain accommodative despite elevated inflation as an impact of higher oil, energy and food prices due to the geopolitical tensions in eastern Europe.
The Monetary Board on March 24 also decided to maintain the interest rates on the overnight deposit facility at 1.5 percent and lending facility at 2.5 percent.
The BSP said upside risks to inflation have increased in 2022 while for 2023, risks are still broadly balanced. Upside risks come from the shortage in domestic pork and fish supply as well as from the potential impact of higher oil prices on transport fares.
To manage price pressures, the BSP continues its support of government implementation of social protection measures to cushion the impact of higher crude oil prices.
Inflation downside risks are mainly COVID-19 infections and emergence of new variants.
As part of its pandemic response, the BSP has injected P2.3 trillion of financial system liquidity since the COVID-19 crisis began in March 2020.
The Monetary Board has reduced the interest rates by 200 basis points (bps) in 2020 and cut banks’ RRR to 12 percent from 14 percent to shore up market confidence and to make sure there are adequate liquidity and credit while battling the public health crisis.
The Monetary Board approved a 400 bps cut to RRR in 2020 but the BSP only reduced the ratio by 200 bps, seeing no further need to use up the entire 400 bps authority to slash the RRR.
The liquidity released due to RRR cuts in 2020 of about P230 billion accounted for 1.17 percent of GDP. In 2019, the BSP reduced the RRR by 400 bps, more than the 200 bps adjustment in 2018.
Since a lower RRR reduces intermediation costs, the BSP wants to reduce RRR to single-digit levels by 2023. The BSP’s RRR of 12 percent for big banks and 14 percent for non-banks is considered one of the highest in the region.