BSP keeps policy rate at record low

THE BANGKO Sentral ng Pilipinas (BSP) kept its key interest rate at a record low for a fifth straight meeting on Thursday, as it vowed to maintain an accommodative stance to support economic recovery.

The BSP left the rate on the overnight reverse repurchase facility at 2%, as widely expected by 14 of 16 analysts in a BusinessWorld poll last week.

Interest rates on the overnight deposit and lending facilities were also kept at 1.5% and 2.5%, respectively.

“The Monetary Board also observed that economic activity has improved in recent weeks, but the overall momentum of the economic recovery remains tentative as the threat of COVID-19 (coronavirus disease 2019) infections continues,” BSP Governor Benjamin E. Diokno said at a briefing on Thursday.

“Downside risks to the inflation outlook continue to emanate from the emergence of new coronavirus variants, which could delay the easing of containment measures and temper prospects for domestic growth,” he added.

Headline inflation has averaged at 4.4% as of May, still above the central bank’s 2-4% target.

The central bank reiterated its support for the Philippine economy “for as long as necessary to ensure its strong and sustainable recovery.”

“The Monetary Board believes that sustained monetary policy support for domestic demand should help the economic recovery gain more traction, especially as risk aversion continues to temper credit activity despite ample liquidity in the financial system,” Mr. Diokno said.

Banks remain risk-averse while many businesses avoided incurring new loans amid uncertainty.

The economy contracted by 4.2% in the first quarter. The investment component or capital formation — shrank by 18.3% — a segment that could be boosted by credit activity.

“It is important to keep the policy stance accommodative to provide continued stimulus to credit and to private sectors spending activity. The space is there for accommodation for as long as necessary to support economic activity until we see stronger and sustainable signs of economic recovery,” BSP Deputy Governor Francisco G. Dakila, Jr. said.

FASTER INFLATION
Meanwhile, Mr. Dakila said the central bank raised the inflation outlook for this year to 4%, from the previous forecast of 3.9%. This matches the upper end of the BSP’s 2-4% target.

If realized, this would be much faster than 2.6% in 2020.

“The factors that led to the revisions in the inflation forecast include higher global crude oil prices as well as a more favorable global growth outlook,” Mr. Dakila said.

Factors that could slow down inflation include the lower-than-expected May inflation and the peso’s strength, he added.

Mr. Dakila said inflation is expected to average 3% for 2022 and 2023.

In May, headline inflation stood at 4.5% for the third straight month, beyond the target but still lower than 4.7% in February. Inflation for the first five months of the year was 4.4%.

Analysts think the BSP will keep record low rates until next year given the uncertainty surrounding the economic recovery.

“Looking further ahead, the BSP is likely to be one of the last central banks in ASEAN to start normalizing policy, as the Philippines probably will achieve herd immunity later than most. All told, expect the overnight reverse repurchase rate to remain at 2% until the end of next year,” Pantheon Macroeconomics Senior Asia Economist Miguel Chanco said in a note.

“With price pressures fading and inflation set to slide back within target in the coming months, we expect BSP to extend its pause for the balance of the year with a possible rate hike by the middle of next year,” ING Bank N.V. Manila Senior economist Nicholas Antonio T. Mapa said. 

The central bank will have its next policy setting on Aug.  12. — L.W.T.Noble