By Melissa Luz T. Lopez
THE CENTRAL BANK on Thursday kept policy rates unchanged anew amid signs that inflation is on a sustained decline, with price increases sure to return to target soon.
The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) voted to keep benchmark interest rates steady on Thursday at the 4.25-5.25% range, marking the second straight meeting in which the policy-setting body held off adjustments.
“The Monetary Board’s decision is based on its assessment of a more manageable inflation environment,” BSP Governor Nestor A. Espenilla, Jr. said in a statement, as read by Deputy Governor Diwa C. Guinigundo during the media briefing yesterday afternoon.
“Latest baseline inflation forecasts show inflation settling within the target band of 3.0% ± 1.0 percentage point for 2019-2020, as price pressures continue to recede due to the decline in international crude oil prices and the normalization of supply conditions for key food items.”
“Inflation expectations have also declined further and are now aligned to the inflation target for 2019-2020,” he added.
This week’s decision was widely expected by market watchers, confident that the BSP will not budge on interest rates just yet.
The central bank raised interest rates in five consecutive meetings last year by a total of 175 basis points, just as inflation surged to the highest level in nearly a decade. The key policy rate currently stands at 4.75%, the highest in nearly a decade.
Inflation eased further to 4.4% in January, marking the third straight month of decline from a nine-year-high 6.7% in September and October although still above the 2-4% target band.
Central bank officials have said that this provides enough room to wait and see how the previous rate increases will be absorbed by the financial system.
Now, the BSP sees inflation risks “evenly balanced” for 2019, with the overall pace of price increases expected to slow further in 2020 despite a “more uncertain” global environment.
“Given these considerations, the Monetary Board deems the prevailing monetary policy settings to be appropriate, as previous monetary responses continue to work their way through the economy,” Mr. Espenilla added.
The central bank now expects inflation to trend even slower until next year, with price movements seen to return to target as early as March.
BSP Assistant Governor Francisco G. Dakila, Jr. said the latest forecast now stands at 3.1% for 2019, down from 3.2% previously, while the 2020 estimate was maintained at three percent.
“We still continue to expect inflation to settle below four percent by March of this year,” Mr. Dakila added.
The BSP official attributed the lower inflation forecast largely to a drop in world crude prices, with the estimate for Dubai crude down to $61.31 per barrel from $69.41/barrel in the December review.
Base effects will also come into play as price shocks from oil, food and excise taxes “dissipate.”
Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, said the window is open for policy makers to unwind their previous tightening moves.
“BSP’s inflation forecasts validate that the BSP is likely done with its tightening cycle, with a policy reversal in sights given slowing growth momentum and inflation in-check,” Mr. Mapa said in a market report.
He noted that a cut in bank reserve requirement ratio (RRR) may be announced as early as this month. “We expect BSP to announce a reduction in reserve requirements at an off-cycle meeting given Governor’s assertions that the RRR is no longer a policy tool.”
London-based Capital Economics also said it expects a cut in interest rates amid a “worsening outlook” for the economy, after gross domestic product growth slowed to 6.2% from 2017’s 6.7%, well below the government’s 7-8% growth target for 2018.
The BSP’s next rate-setting review is on March 21.