BSP keeps interest rates steady but warns of higher inflation ahead

MANILA, Philippines—The Bangko Sentral ng Pilipinas (BSP) has decided to keep its key interest rate unchanged, saying that inflation risks remain “broadly balanced” for the rest of 2021 and that the country needed more help to regain its footing as it goes through the sharpest economic contraction since World War II in 2020.

At the same time, however, the policy making Monetary Board fired a signal to financial markets to brace for higher consumer prices in the next few months by raising its full year consumer price index forecast from 4 percent set last month to 4.2 percent at a meeting on Thursday (March 25).

At an online press briefing, BSP Governor Benjamin Diokno said “the Monetary Board noted that latest inflation forecasts have shifted higher over the policy horizon.”

“Inflation may breach the upper end of the target range of 2-4 percent in 2021, reflecting the impact of supply-side constraints on domestic prices of key food commodities such as meat as well as the continuing uptick in international oil prices,” he said.

“Nevertheless, inflation is still seen to return within the target band in 2022 as supply-side influences subside,” Diokno added.

In the wake of this, the BSP kept its overnight borrowing rate, which banks use as basis for their lending rates, was kept at an all-time low of 2 percent. The interest rates on overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent.

The BSP chief said that the balance of risks to inflation outlook remains broadly balanced and not expected to move wildly in 2021 and deescalate in 2022.

He explained that lower domestic supply of meat products and improved global economic activity could add to upward pressure on inflation. But he noted that the ongoing pandemic also continued to press downward pressure on inflation outlook as the recent surge in coronavirus infections and delays in mass vaccination tend to shackle consumer demand.

“Given these considerations, the Monetary Board is of the view that prevailing monetary policy settings remain appropriate to support the government’s broader efforts to facilitate the recovery of the economy,” Diokno said.

The Monetary Board also stressed that the timely implementation of non-monetary measures was crucial in mitigating the impact of declining supply on inflation and preventing this from spilling over as second round effects.

“Looking ahead, the BSP will remain watchful for any signs of inflation becoming broader based,” Diokno said. “The BSP is prepared to take immediate measures as appropriate to ensure that the monetary policy stance continues to support the price and financial stability objectives.”

TSB