The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday retained the overnight borrowing rate at a record low of 2 percent, despite the US Federal Reserve’s approval of first interest rate hike in more than three years.
BSP Governor and MB chairman Benjamin Diokno said in an online briefing the interest rates on the overnight deposit and lending facilities were also kept unchanged at 1.5 percent and 2.5 percent, respectively.
“Latest baseline forecasts have increased from the previous monetary policy meeting, reflecting the impact of higher global commodity prices. Average inflation could breach the upper end of the 2-4 percent target range in 2022 at 4.3 percent, higher than the February forecast of 3.7 percent,” Diokno said.
“Nevertheless, average inflation is projected to decline and settle within the target band at 3.6 percent in 2023. Inflation expectations have likewise risen but continue to be anchored to the 2-4 percent target band,” Diokno said.
The policymaking Federal Open Market Committee of the US Fed earlier announced a 25-basis-point hike after keeping its benchmark interest rate near zero since the start of the pandemic and plans more aggressive adjustments in the coming months.
ING Bank Manila senior economist Nicholas Antonio Mapa warned the BSP might lose a grip on inflation and fall behind the curve if it decides to keep policy rates unchanged this year.
Mapa said by the second half, the US Federal Reserve might have hiked a cumulative 100 bps with guidance from Fed chairman Jerome Powell suggesting that a 50-bps rate hike at the next meeting was very much in play.
“Should BSP opt to sit out the first half even as inflation surges past target we could very well see BSP fall behind the curve again as they did in 2018. By then with inflation raging and with Filipinos saddled with astronomically high transport costs, BSP will be losing the most important battle of its inflation targeting mandate: the battle to anchor inflation expectations,” Mapa said.
Diokno, in explaining the decision to retain the interest rate, said that while upside risks to inflation increased in 2022, the balance of risks to the outlook remained broadly balanced for 2023. He said upside risks over the near term continued to emanate from the shortage in domestic pork and fish supply and from the potential impact of higher oil prices on transport fares.
“In this regard, the BSP supports the implementation of social protection measures to alleviate the impact of rising crude oil prices on vulnerable sectors. Sustained initiatives to ensure adequate domestic food supply could also mitigate further supply-side pressures on inflation,” he said.
Meanwhile, Diokno said downside risks were linked mainly to the lingering threat of COVID-19 infections, as the emergence of new variants could temper the global economic recovery and prompt the re-imposition of domestic containment measures.
Diokno said the Monetary Board observed that domestic economic activity gained stronger traction with the easing of remaining mobility restrictions, but the heightened geopolitical tensions and a resurgence in COVID-19 infections in some countries clouded the outlook for global economic growth.
“Supply-chain disruptions could also contribute to inflationary pressures, and thus warrant closer monitoring to enable timely intervention in order to arrest potential second-round effects,” he said.
He said that on balance, the Monetary Board saw scope to maintain the BSP’s policy settings to safeguard the momentum of economic recovery amid increased uncertainty, even as it continued to develop plans for the gradual normalization of extraordinary liquidity measures.
“Given the potential broadening of price pressures over the near term, the BSP stands ready to respond to the buildup in inflation pressures that can disanchor inflation expectations, in keeping with its price and financial stability objectives,” he said.
The Monetary Board raised the inflation forecast for 2022 to 4.3 percent from 3.7 percent made during the February 2022 meeting. The forecast for 2023 was also raised to 3.6 percent from 3.3 percent.
Diokno said keeping the policy rate steady would support bank lending in the coming months. He said bank lending gained momentum recently after it grew by 8.5 percent year-on-year in January from 4.8 percent in December 2021, the sixth consecutive month of expansion.
He said the cut in the reserve requirement of banks remained on the table, adding it might happen in the second half of the year.
Rizal Commercial Banking Corp. chief economist Michael Ricafort said any potential hike in the local policy rate going forward would likely follow any Fed rate hikes from 2022 to 2024, which could start in the latter part of 2022.
The BSP in 2020 reduced the policy rate by a total of 200 basis points to a record-low 2 percent, and the reserve requirement ratios by another 200 basis points to 12 percent to unleash more liquidity into the financial system.