Interest rates untouched as BSP sees signs of economic recovery

MANILA, Philippines—The Philippine central bank kept its key interest rates unchanged on Thursday (June 24), pointing to encouraging signs that the country’s ultra loose monetary policy regime is helping the economy recover from its deepest postwar slump.

At an online press briefing, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said that the Monetary Board decided to maintain the interest rate on overnight borrowing rate—on which banks use to price their own loans—at 2 percent.

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

“The Monetary Board also observed that economic activity has improved in recent weeks, but the overall momentum of the economic recovery remains tentative as the threat of COVID-19 infections continues,” the BSP chief said, explaining the decision which was widely expected by market watchers.

“Nevertheless, the sustained implementation of targeted fiscal initiatives as well as the acceleration of the government’s vaccination program should help boost market confidence and recovery of the economy in the coming months,” said Diokno.

According to Diokno, the latest inflation forecasts indicated that the average inflation was likely to settle near the upper end of the target range of 2-4 percent in 2021.

The BSP expects average inflation to ease towards the midpoint of the target range in 2022 and 2023.

“Price pressures on food commodities have abated with favorable weather conditions and the facilitation of meat imports to augment domestic supply,” he said. The Monetary Board, according to Diokno, is of the continued belief that implementing non-monetary measures was crucial in addressing supply bottlenecks that can cause inflation.

The BSP chief said risks to the inflation outlook remain “broadly balanced” around the baseline projection path. An uptick in international commodity prices amid supply-chain bottlenecks and the recovery in global demand could lend upside pressures on inflation.

Downside risks to the inflation outlook, however, continue to emanate from the emergence of new coronavirus variants, which could delay the easing of containment measures and temper prospects for domestic growth.

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

“The Monetary Board believes that sustained monetary policy support for domestic demand should help the economic recovery gain more traction, especially as risk aversion continues to temper credit activity despite ample liquidity in the financial system,” he added.

TSB