DESPITE NEW INFLATION RISKS, BSP KEEPS RATES
THE Bangko Sentral ng Pilipinas (BSP) Monetary Board opted to keep all monetary policy levers unmoved in its second meeting for 2021, shrugging off its own projection of an inflation target breach for this year.
In its post-monetary policy setting briefing on Thursday, BSP Governor Benjamin Diokno announced that they have decided to maintain the interest rate on the BSP’S overnight reverse repurchase facility at 2.0 percent. The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.
The decision was made despite their newest inflation forecast, which was adjusted to 4.2 percent for this year, up from the 4-percent projection in the previous meeting. This means that the BSP is preparing for inflation to breach the government’s target of 2 to 4 percent for this year.
BSP officials said they are able to keep the monetary policy accommodative for the time being as inflation drivers are largely supply side in nature and transitory. This means that monetary policy is not the most appropriate tool to lower this kind of price swelling.
The country’s central monetary authority has been aggressively accommodative in 2020. In total, the BSP has lowered the country’s benchmark interest rates to its all-time low of 2 percent by cutting 200 basis points in a span of less than a year.
This accommodative stance, however, is being threatened by rising prices, a problem which is usually resolved by tightening or hiking interest rates.
The BSP said earlier that, at the moment, current monetary policy rates remain appropriate and that inflation risks remain temporary and transitory.
“It is in the nature of supply disturbances that it is temporary and transitory. What we have to guard against is the possibility of that being translated to second round increases in prices. As of this moment there is really no evidence of any spillovers to other commodities apart from those that are subject to the supply shocks,” BSP Deputy Governor Francisco Dakila said.
For next year, the BSP also revised its inflation forecast slightly upward but still within target from 2.7 percent in the previous meeting now to 2.8 percent.
Diokno, meanwhile, reiterated that they stand ready to respond to rising inflationary pressures should the need for monetary policy intervention is needed, even if it means unwinding their aggressive easing in 2020.
“The BSP will remain watchful for any signs of inflation becoming broader based. The BSP is prepared to take immediate measures as appropriate to ensure that the monetary policy stance continues to support the BSP’S price and financial stability objectives,” Diokno said in his statement.
ING Bank Manila economist Nicholas Mapa said the BSP is likely to keep its monetary policy settings low for as long as they can to support the ailing local economy.
“We expect BSP to keep policy rates unchanged in the near term, with BSP willing to look past the supply side-induced price spike for now to maintain support for the economic recovery,” Mapa said.
“BSP may only consider a possible rate hike should inflation remain stubbornly high, which could disanchor inflation expectations and spark second round effects such as wage and transport fare adjustments,” he added.
Rizal Commercial Banking Corporation (RCBC) economist Michael Ricafort also agreed with the BSP’S move to help pull the economy out of recession.
“The economy still needs all the support measures that it could get. Monetary easing, at least by keeping policy rate steady at the record low of 2 percent, would still be needed to support economic recovery prospects from Covid-19,” Ricafort said.
However, the economist warned that the BSP will have to tread “a delicate balancing act” between inflation and the economy down the line, especially if spillovers to price increases start to show.