BSP seen keeping interest rates steady amid expectations of lower inflation in second half
MANILA, Philippines — The central bank will likely keep its key interest rates unchanged when the policy-making Monetary Board convenes later this month to tackle the recent spike in the country’s consumer prices.
This development comes after the government announced on Friday that the inflation rate for February rose to 4.7 percent, exactly as the Bangko Sentral ng Pilipinas’ economists predicted last week.
In a statement, BSP Governor Benjamin Diokno said the latest outturn is “consistent” with the central bank’s assessment of a transitory uptick in inflation in the first half of 2021, “reflecting the impact of weather-related disturbances, the African swine fever on food prices, higher global oil prices, as well as positive base effects.”
The average inflation rate is expected to remain with the 2-4 percent target range over the policy horizon, he added.
Over the near term, however, Diokno said that the projected upward trend in inflation is seen to be temporary, driven primarily by supply-side factors.
In addition, monetary planners believe that the future inflation may be restrained by the the continued uncertainty caused by the pandemic on domestic and global economic activity.
On the other hand, it could be pushed higher by the possibility of an early rollout of COVID-19 vaccines in the country, which will spur increased economic activity.
For now, however, Diokno explained that the sources of near term inflation are supply-side shocks in nature that should not require a monetary response unless they lead to second-round effects.
“Supply-side shocks are best addressed by non-monetary interventions that ease domestic supply constraints,” he said. “Currently, direct measures are being pursued by the national government to enhance the availability of affected commodities.”
He added that the Monetary Board will “consider carefully” recent price developments that could influence the outlook for inflation along with evidence of second-round effects during the monetary policy meeting on March 25.
According to ING Bank Manila senior economist Nicholas Mapa, the central bank chief has quelled
concerns about a possible policy rate hike in the near term.
“Diokno however did indicate that monetary authorities were on the lookout for signs of second-round effects (wage or transport fare adjustments) and if the recent spike in prices could affect the inflation outlook over the policy horizon,” he said.
“For the meantime, Diokno does appear confident that inflation will eventually tapper off in the second half of the year once direct supply-side remedies to food supply shortages take root,” Mapa explained. “We expect BSP to remain sidelined for 2021 while inflation will likely remain elevated in the near term before gradually decelerating by the third quarter.”
