Central bank keeps rates steady

THE CENTRAL BANK on Thursday kept its benchmark interest rate at a record low to support the Philippine economy’s recovery from the coronavirus pandemic.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno also said inflation is likely to remain elevated but manageable over the next few months.

In its first policy setting for the year, the Monetary Board maintained the overnight reverse repurchase rate at a record low of 2%. The lending and deposit facilities were likewise kept at 2.5% and 1.5%, respectively.

“The balance of risks to the inflation outlook now appears to be broadly balanced around the baseline path in 2021 but is seen to continue leaning toward the downside in 2022,” Mr. Diokno said in an online briefing.

“Tighter supply of meat products owing in part to the African Swine Fever outbreak in the country could lend further upside pressures on inflation,” he added.

A BusinessWorld poll showed 17 out of 18 analysts expected the Monetary Board to leave policy settings unchanged at the meeting on Thursday.

Headline inflation reached a two-year high at 4.2% in January, as prices of meat and vegetables spiked due to supply shortages.

INFLATION OUTLOOK
Meanwhile, the BSP raised its average inflation forecast for the year to 4%, the upper end of its 2-4% target range, from 3.2% previously.

The central bank also lowered its inflation forecast for next year to 2.7% from 2.9% previously, BSP Deputy Governor Francisco G. Dakila said in the same briefing.

“On balance, the Monetary Board is of the view that the manageable inflation outlook continues to allow the BSP to maintain an accommodative policy stance and thus complement crucial fiscal policy measures in supporting economic activity and market confidence,” Mr. Diokno said.

The BSP also raised its forecast for average Dubai crude oil prices for 2021 and 2022 to $54.65 (from $47.57) and $51.98 ($47.44) per barrel, respectively.

“We know the driver behind that recovery in oil prices, that as the global economy gains momentum, as we are able to deal with the pandemic, and as restrictions are relaxed more, then there is going to be a recovery in oil demand,” Mr. Dakila said.

Avoiding a knee-jerk reaction to raise rates was the “optimal decision at this point,” allowing the BSP to support growth, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in a note.

“BSP officials are cognizant of the ills of high inflation but they are also fully aware that any rate hike would have little to no impact on the price of pork or vegetables, the two main sources of the breach,” he said.

Mr. Mapa said he expects the central bank to go for a policy action once the second-round effects from inflation become apparent.

“We expect BSP to retain its accommodative stance in the medium term to support the recovery and only consider a reversal should second-round effects surface,” he added.

Alex Holmes, an economist at Capital Economics, said the pause will only be momentary and further easing will be on the table by the latter part of the year.

“The rise in inflation should prove temporary, a point the BSP stressed in Thursday’s meeting. Fuel and transport price inflation will begin to drop back in the second quarter, while the upward pressure on food prices from the disruption caused by typhoons late last year should subside,” he added.

The BSP slashed rates by a cumulative 200 basis points last year, at a time when the economy saw its worst contraction on record due to the pandemic.

Despite an unprecedented policy easing by the BSP that included massive buying of government securities, banks have remained risk-averse in extending loans.

Bank lending fell for the first time in more than 14 years in December, reflecting weak consumer and business activity.

The next Monetary Board policy meeting is scheduled on March 25. — L.W.T. Noble with Reuters