Saying PH economy needs more help, BSP keeps interest rates at record low

MANILA, Philippines—The central bank on Thursday (Aug. 12) kept key interest rate at historic lows despite fears of an uptick in inflation, saying the pandemic-ravaged Philippine economy needs more help from cheap funds to get back on its feet.

At an online briefing, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the Monetary Board decided to maintain the interest rate on its overnight borrowing rate—which banks use as basis for their loan pricing decisions—at 2 percent.

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

“The Monetary Board remains keen on sustaining monetary policy support for as long as necessary in order for the momentum of economic recovery to gain more traction as well as to help boost domestic demand and market confidence, especially as risk aversion continues to temper credit activity,” Diokno said, reiterating his earlier position that the BSP will keep rates as low as possible for as long as necessary.

Diokno—chairs of the seven-person Monetary Board—warned that the reimposition of quarantine measures to arrest the recent wave of COVID-19 cases could pose a risk to the ongoing economic recovery effort.

To this end, targeted fiscal and health interventions, especially the acceleration of the government’s vaccination program, will be crucial in safeguarding public health and preventing deeper negative effects on the Philippine economy, he said.

The central bank chief noted that the agency’s latest inflation forecasts have shifted marginally higher, reflecting the recent increase in global commodity prices and the depreciation of the peso.

“Average inflation is seen to settle slightly above the upper end of the target band of 2-4 percent in 2021,” he said.

He added, though, that continued and timely implementation of non-monetary initiatives and reforms to mitigate supply-side pressures on meat and other food prices, will ease inflation toward the midpoint of the target range in 2022 and 2023, when President Rodrigo Duterte is no longer president.

“Meanwhile, inflation expectations remain firmly aligned with the baseline projection path,” he said.

At the same time, the BSP believes that risks to inflation outlook remained “broadly balanced”, with prices being pushed upward by the uptick in international commodity prices due to improving global demand amid lingering supply-chain bottlenecks.

However, downside risks to the inflation outlook are also seen from the spread of more contagious coronavirus variants. In particular, delays in the lifting of containment measures could further dampen prospects for global growth and domestic demand.

“On balance, the Monetary Board is of the view that the expected path of inflation and downside risks to domestic economic growth warrant keeping monetary policy settings unchanged,” Diokno said.

TSB