The Bangko Sentral ng Pilipinas’ (BSP) Monetary Board has decided to maintain its current 6.5 percent target reverse repurchase (RRP) rate or the policy rate since risks to inflation has diminished while prospects for domestic activity remains intact.
In a press briefing Thursday, Feb. 15, with inflation expectations now firmly anchored to the inflation target, BSP officials announced lower risk-adjusted inflation forecasts for 2024 and 2025 which are within the government target of two percent to four percent.
For this year, the Monetary Board approved a risk-adjusted inflation forecast of 3.9 percent, down from 4.2 percent during the previous policy meeting on Dec. 14, 2023.
For 2025, the risk-adjusted inflation forecast is 3.5 percent, slightly lower than the previous 3.4 percent estimate.
BSP Senior Assistant Governor Iluminada T. Sicat said risks to the inflation outlook are still persistently on the upside.
“The risks to the inflation outlook have receded but remain tilted toward the upside,” she said. Risks to the inflation forecasts remain as: higher transport charges; increased electricity rates; higher oil and domestic food prices; and the additional impact on food prices of a strong El Niño episode.
“On the other hand, the implementation of government measures to mitigate the impact of El Niño weather conditions is the primary downside risk to the outlook,” she said.
Sicat also said that the recent agreement with Vietnam to secure rice supply for the country in the next five years is encouraging and will impact on rice prices.
“Moreover, the efforts to increase productivity in the rice sector, including the distribution of drought-resistant seeds, are a step in the right direction,” she added.
The BSP official reiterated that for now, they remain hawkish and will keep the target RRP rate of 6.5 percent in the near term.
“The BSP remains ready to adjust its monetary policy settings as necessary in keeping with its primary mandate to safeguard price stability,” she said.
Most economists and market analysts anticipate the BSP will reduce its key rate in the second half of 2024, along with a similar decision by the US Federal Reserve to cut its own rates.
Sicat said that if the risks to the inflation outlook will be reduced further, and also the path of actual inflation decelerates as what happened in December 2023 and January 2024, “there might be consideration to change the monetary policy stance.” The last two consumer price index (CPI) reports were below four percent or within the target range of two percent to four percent.
Both Sicat and BSP Director for the Department of Economic Research Dennis D. Lapid said that in setting the latest inflation forecast – both baseline and risk-adjusted – the BSP has the same exchange rate assumption as the government of P55 to P58 to a US dollar for this year, but did not disclose its point or single rate for the peso that it uses in making policy decisions.
The BSP also has a lower gross domestic product (GDP) growth assumption compared to the 6.5 percent to 7.5 percent target of the Development Budget Coordinating Committee.
Still, Sicat said that 5.6 percent fourth quarter 2023 and overall 2023 GDP growth “reaffirms the BSP’s view that the country’s growth momentum remains intact over the medium term.”
“However, recent indicators also suggest that economic activity could moderate in the near term as the full impact of the BSP’s prior monetary policy tightening continues to manifest,” she said.
During its policy meeting on Feb. 14, which was advanced from Thursday due to some Monetary Board members' personal schedules, the seven-member Monetary Board also decided to keep the interest rates on the overnight deposit at six percent and lending facilities at seven percent.
The last time the BSP adjusted its key rate was Oct. 26, 2023 when it raised the target RRP by 25 basis points to prevent the inflation outlook from being disanchored to the target.
During that time, the BSP said it had to urgently adjust the key rate to prevent supply-side price pressures from creating second-round effects and dislodging the inflation path.