BSP sees inflation easing sooner than expected, keeps interest rates steady

Bangko Sentral ng Pilipinas Governor Benjamin Diokno. EDWIN BACASMAS

MANILA, Philippines—The Philippine central bank on Wednesday (May 12) opted to keep its key interest rate unchanged, saying that the pace of consumer price increases appear to be easing and will likely return to within the government’s forecast range earlier than originally expected.

At an online press briefing, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the Monetary Board decided to maintain the yield on the overnight borrowing rate at 2 percent.

The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent.

“Latest inflation forecasts indicate that inflation is likely to settle within the target range in 2021 and 2022,” he said.

“Inflation is now projected to track a slightly lower path in 2021 to average near the upper end of the target band, as price pressures on food commodities are abating with improved weather conditions, the impact of Executive Orders No. 128 and 133, and the implementation of direct non-monetary interventions to alleviate supply constraints,” Diokno added.

The BSP chief was referring to two orders signed by President Rodrigo Duterte recently lowering barriers to pork importations to help ease local market prices which have been a major driver of inflation in recent months.

Pork prices have been elevated since 2020 due to the African swine fever outbreak which decimated hog supplies around the country, with Luzon producers being the hardest hit.

Diokno noted that the inflation forecast for 2022 is seen to remain near the middle of the target but has increased slightly owing in part to rising international crude oil prices.

“The risks to the inflation outlook are also broadly balanced,” he said.

“The Monetary Board emphasizes that the timely implementation of approved non-monetary measures will be crucial in mitigating further supply-side pressures on meat prices and inflation,” Diokno said.

At the same time, the Monetary Board expects the domestic economy to continue to recover in the coming months, aided by the government’s targeted fiscal interventions and the sustained rollout of its vaccination program.

Improved prospects overseas should also support the outlook for domestic economic activity.

“However, the recent surge in COVID-19 infections and the resulting measures to contain it continue to temper market confidence and pose substantial downside risks to domestic demand,” Diokno warned.

“On balance, the expected path of inflation and downside risks to domestic economic growth warrant keeping monetary policy settings steady,” he said. “The Monetary Board believes that sustained support for domestic demand remains a priority for monetary policy, especially as risk aversion continues to hamper credit activity despite ample liquidity in the financial system.”

TSB