BSP keeps interest rates steady but warns vs inflation

MANILA, Philippines—The central bank on Thursday (Sept. 23) kept its key interest rates unchanged to aid economic recovery, as expected, but also warned that inflation is again casting a threatening shadow because of supply bottlenecks—a phenomenon beyond the Bangko Sentral ng Pilipinas’ (BSP) capability to solve.

At an online briefing, BSP Governor Benjamin Diokno said the Monetary Board decided to maintain the interest rate for overnight borrowing at 2 percent. Interest rates on overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent.

“Latest baseline forecasts indicate a higher inflation path over the policy horizon,” Diokno said. “Average inflation is seen to settle slightly above the upper end of the target band of 2-4 percent in 2021.”

At Thursday’s meeting, the Monetary Board approved an upward adjustment in the country’s inflation rate forecast for 2021 to 4.4 percent from the previous forecast of 4.1 percent set last July.

“This reflects the impact of recent supply disruptions on food prices, which contributed in part to the higher-than-expected inflation outturn in August,” Diokno said. “Nevertheless, inflation is projected to settle close to the midpoint of the target range in 2022 and 2023.”

The country’s chief monetary regulator said inflation expectations “remain firmly aligned with the baseline projection path.”

At the same time, risks to the inflation outlook have tilted toward the upside for the remaining months of 2021 but remains broadly balanced for 2022 and 2023.

Diokno said upside risks may emanate from pressures on international commodity prices amid rising global demand and lingering supply chain bottlenecks. The potential effects of weather disturbances and a possible prolonged recovery from the African swine fever outbreak could also continue to exert upside pressures on prices.

Downside risks are seen from the spread of more contagious coronavirus variants, as potential delays in the lifting of containment measures could further dampen prospects for global growth and domestic demand.

The Monetary Board also noted that the outlook for recovery continued to hinge on timely measures to prevent deeper negative effects on the Philippine economy.

“To this end, the acceleration of the government’s vaccination program and a recalibration of existing quarantine protocols will be crucial in supporting economic activity while safeguarding public health and welfare,” Diokno said.

“On balance, the Monetary Board is of the view that prevailing monetary policy settings remain appropriate given the manageable inflation environment and uncertain growth outlook,” Diokno said.

“The Monetary Board reiterates that, together with appropriate fiscal and health interventions, keeping a steady hand on the BSP’s policy levers will allow the momentum of economic recovery to gain more traction by helping boost domestic demand and market confidence,” he added.

TSB