The Bangko Sentral ng Pilipinas (BSP) said it is closely monitoring the economy and financial sector during its pause and hold period following nine straight policy rate hikes.
“A pause in the monetary tightening cycle allows for observation of further data to assess how macroeconomic and financial conditions will evolve,” according to the BSP in its latest Monetary Policy Report (MPR).
The BSP on May 18 decided to retreat from its year-long tightening stance by keeping its overnight reverse repurchase (RRP) rate unchanged at 6.25 percent. With the pause, the BSP has some time to review markets’ conditions after the aggressive rate hikes, especially asset prices. The interest rates on the overnight deposit and lending facilities were also left unchanged at 5.75 percent and 6.75 percent, respectively.
“While there remains limited evidence of asset price bubbles or stretched market valuations domestically, a record-high interest rate environment necessitates close monitoring to prevent the build-up of financial imbalances, especially,” said the BSP.
Furthermore, the central bank noted that keeping interest rates unchanged “accords with potential financial stability considerations amid steady liquidity and credit growth, banks’ sound lending standards to businesses and households in Q1 and Q2 2023, as well as tighter global financial conditions.”
BSP Governor Felipe M. Medalla said last week that they could maintain a hold stance for two to three more Monetary Board policy meetings before taking further action. The implication is the pause will last until August or September this year.
But then in the report, the BSP underscores its readiness to resume interest rate action “as necessitated by the potential upside risks in the near term, in keeping with the BSP’s primary mandate to ensure price stability.” The reason for this is because there are more upside risks to inflation than downside risks.
For the time being and with the information and data available to the BSP, the Monetary Board which is headed by Medalla thinks there is scope for a prudent pause in the current monetary policy tightening cycle while keeping the tightening bias.
In the MPR, the inflation is projected to return gradually to within the two percent to four percent target this year. The Monetary Board on May 18 has revised the forecasts lower to 5.5 percent for 2023 and 2.8 percent for 2024 versus its March 23 estimates of 6.1 percent for this year and 3.1 percent in 2024.
The BSP said that even as headline consumer price index (CPI) has continued to decline from January’s 8.7 percent to April’s 6.6 percent with the slower increases in food and energy prices, the core CPI has only eased marginally in April at 7.9 percent from eight percent in March.
“This suggests that maintaining the policy interest rate at its current level may be necessary. Persistent price pressures will require continued monitoring, particularly given the predominance of upside risks to the inflation outlook and the possible emergence of further second-round effects. (The government) should continue to monitor indications of a moderation in domestic spending activity, as the full weight of monetary tightening continues to manifest fully in quarterly GDP (gross domestic product) data,” according to the report.
The MPR noted the risks to the inflation outlook are tilted more to the upside for this year and in 2024.
Upside risks to inflation are: potential impact of additional transport fare hikes; minimum wage adjustments; higher domestic prices of key food items facing supply constraints; and the impact of El Niño weather conditions on food and electricity prices.
“The potential wage adjustments based on recent legislature discussions and further shocks to food and energy from El Niño conditions could also lead to renewed second round effects. Meanwhile, the impact of a weaker-than-expected global recovery remains the primary downside risk to the outlook,” said the BSP.