BSP policy rates kept at record lows

The key interest rates of the Bangko Sentral ng Pilipinas (BSP) were maintained at their record lows on Thursday as monetary authorities project the average inflation returning within target this year.

Overnight borrowing, lending and deposit rates were retained at 2.00 percent, 1.50 percent and 2.50 percent, respectively, following the central bank’s policymaking Monetary Board’s third rate-setting policy meeting for 2021.

“Latest inflation forecasts indicate that inflation is likely to settle within the target range in 2021 and 2022,” BSP Governor Benjamin Diokno said in a virtual briefing.

He added that inflation is expected to moderate marginally in 2021, averaging near the upper end of the target range, as price pressures on food commodities ease due to improving weather conditions, the effect of Executive Order (EO) 128 and Proclamation 133, and the impact of non-monetary direct measures to relieve supply constraints.

EO 128 allows for the importation of an increased volume of pork products at lower tariffs while Proclamation 133 places the entire country under a state of calamity due to the African swine fever (ASF), which will allow local government units to use part of their calamity funds to fight the spread of ASF.

According to BSP Deputy Governor Francisco Dakila Jr., the central bank adjusted downward its inflation estimate from 4.2 percent to 3.9 percent for this year. The 2022 forecast was hiked to 3 percent from 2.8 percent.

Dakila attributed the new outlook to the impact of lower tariffs on imported pork, the lower-than-expected inflation in March and April, and the impact of the first quarter gross domestic product outturn.

Last month, the slower uptick in prices of food and non-alcoholic beverages dragged the country’s headline inflation rate to remain at 4.5 percent, bringing the average figure to 4.5 percent in the first four months of the year.

Meanwhile, the economy stayed in recession in January to March this year as it contracted by 4.2 percent.

“The risks to the inflation outlook are also broadly balanced. The Monetary Board emphasizes that the timely implementation of approved non-monetary measures will be crucial in mitigating further supply-side pressures on meat prices and inflation,” Diokno, meanwhile, emphasized.

Diokno further said the Monetary Board anticipates that the domestic economy would continue to improve in the coming months, helped by the government’s targeted fiscal measures and the continued implementation of its vaccination program for the coronavirus disease 2019 (Covid-19).

Improved international opportunities should also help boost domestic economic activity.

“However, the recent surge in Covid-19 infections and the resulting measures to contain it continue to temper market confidence and pose substantial downside risks to domestic demand,” the Bangko Sentral chief also highlighted.

Overall, he said the projected course of inflation and the threats to domestic economic growth justify maintaining current monetary policy settings. The Monetary Board believes that monetary policy should continue to support domestic demand, particularly as risk aversion continues to stifle credit activity despite sufficient liquidity in the financial system.

“Looking ahead, the BSP affirms that maintaining an accommodative stance should quicken the economy’s transition toward a sustainable recovery.”

Diokno assured that the central bank would continue to use its full range of instruments to support its price and financial stability mandates.