BSP keeps interest rates at record low

The overnight interest rate at which the Bangko Sentral ng Pilipinas (BSP) borrows from banks and other financial institutions remained at a record low of 2 percent as monetary authorities expected the country’s inflation situation continuing to be manageable.

As with the policy rate or overnight reverse repurchase facility, the Monetary Board in its policy meeting on Thursday likewise kept both key rates unchanged—the overnight deposit rate at 1.5 percent and the overnight lending rate at 2.5 percent.

“The Monetary Board sees enough scope to keep a patient hand on the BSP’s policy levers owing to a manageable inflation environment,” BSP Governor Benjamin Diokno said in a press briefing.

Diokno noted that the emergence of new COVID-19 variants as well as the potential tightening of global financial conditions pose threats to economic recovery in the Philippines.

“Hence, preserving ongoing monetary policy support at this juncture shall help sustain the economy’s momentum over the next few quarters,” he said.

The BSP chief said the Monetary Board thinks that economic growth now appears to be on firmer ground, thanks to the government’s accelerated vaccination program and calibrated relaxation of quarantine protocols.

“In particular, credit activity has gradually recovered in recent months, reflecting improved business activity and market sentiment,” he said.

Following the inflation result for November, which was pegged at 4.2 percent, the latest forecasts for 2021 and 2022 went slightly higher from the previous assessment round.

Last month’s outturn put the average inflation in January to November at 4.5 percent, still above the government target range of 2 percent to 4 percent.

“Nevertheless, the projected inflation path remains within the inflation target band of 2-4 percent over the policy horizon,” Diokno said, reiterating that average inflation is expected to approach 3 percent in 2023.

For 2022, Diokno said risks to the inflation outlook still put the rate higher than the target.

“Upside risks are linked mainly to the potential impact of continuing constraints on the supply of key food items and petitions for transport fare hikes,” he said.

In a meeting held earlier this week, the interagency Development Budget Coordination Committee decided to retain the inflation target range of 2 percent to 4 percent, which it said “continues to be an appropriate quantitative representation of the medium-term goal of price stability.”

But according to United Kingdom-based research firm Pantheon MacroEconomics, inflation results in November “gives no real reason to celebrate.”

“Crucially, it was caused almost entirely by favorable base effects in food prices, which won’t be of much help beyond January (2022),” said Miguel Chanco, Pantheon’s senior economist on Asia.

“The Philippines is a net importer of food and it arguably is more vulnerable to imported price pressures in the current climate, given the weakening supply picture locally,” Chanco said.

Since the start of the pandemic 20 months ago, the central bank has released an estimated P2.2 trillion worth of liquidity into the local financial system—including billions of pesos in direct loans to the national government—to cushion the economic impact of the COVID-19 crisis.

The BSP chief has repeatedly assured financial markets that these liquidity support measures would be withdrawn only once the Philippine economy is on firmer footing, and only in a gradual manner.

Market watchers now expect central bank to start raising interest rates by the second quarter of next year at the earliest or closer to the fourth quarter in the event that the recovery hits more snags due to the lingering effects of the pandemic.