The Bangko Sentral ng Pilipinas (BSP) has shed its “patient” monetary stance and saying it could raise the record low two-percent interest rate sooner than the previously announced second half of 2022 as price pressures escalate due to the Russia-Ukraine war.
“We’re prepared to take pre-emptive action as needed if inflation expectations become at risk of becoming disanchored,” said BSP Governor Benjamin E. Diokno on Tuesday, April 5, during the 2022 Philippine Economic Briefing press conference.
The BSP’s Monetary Board has kept the two-percent benchmark rate during its first two policy meetings last Feb. 17 and March 24. The next two upcoming monetary policy meetings are scheduled on May 19 and June 23, its third and fourth policy meetings, while the fifth of eight policy meetings will be in the third quarter or August 18.
Diokno said the timing of their “disengagement strategy” remains on track despite the Russia-Ukraine crisis. “We’re still looking at the second half of the year for our normalization strategy,” he told reporters.
However, the BSP chief did not repeat his previous pronouncements that the BSP has ample scope to keep a patient hand as they keep an eye on potential risks to inflation. As of March, inflation rate has risen to four percent from just three percent in February and January, and at the top end of the two-four percent target.
Diokno did say that as of the Monetary Board’s last policy meeting on March 24, their assessment at the time was that maintaining the policy rate at the current level was appropriate “given increased uncertainties surrounding the outlook for both inflation and growth.”
“However, recent data including the latest inflation number this March of four percent suggests that inflation is likely to remain elevated in the coming months so this means that the BSP must be prepared to take action to prevent price pressures from broadening and becoming more entrenched which would translate to second-round effects. For this reason the BSP is keeping a watchful eye on emerging developments to ensure that the monetary policy stance remains in line with our primary mandate of price stability,” said Diokno.
The BSP chief said they are ready to implement pre-emptive action as warranted to protect the inflation and growth outlook.
He also said that “firmer signs of durable economic recovery will allow us to consider calibrated adjustments in our monetary policy stance consistent with the eventual normalization of our policy settings.”
As of Tuesday, the BSP still thinks that inflation expectations are still anchored to the two-four percent target for 2022, 2023 and 2024.
The BSP on March 24 raised its 2022 inflation forecast to 4.3 percent from its February 17 estimate of 3.7 percent. For 2023, the BSP also forecast a higher inflation rate of 3.6 percent from its previous projection of 3.3 percent.
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.
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 Monetary Board reduced the interest rates by 200 basis points in 2020 and cut banks’ reserve requirement to 12 percent from 14 percent to shore up market confidence and to make sure there are adequate liquidity and credit while battling the Covid-19 pandemic.
In his presentation during the economic briefing, Diokno said that with the recovering economy, the BSP’s pandemic exit strategy will involve recalibration of monetary operations, unwinding of BSP’s liquidity provision, reducing monetary accommodation, and building buffers in preparation for future crises.
“We will continue to assess demand and supply conditions to ensure that we are able to implement our exit strategy in a timely and orderly manner. We will strive to strike the right balance between providing support to the economy on one hand and fulfilling our mandates of price and financial stability on the other,” said Diokno.