MANILA, Philippines — Low inflation and weakened growth were enough reasons for the Bangko Sentral ng Pilipinas (BSP) to keep the monetary stimulus flowing by keeping key rates at their record-lows on Wednesday.
Overnight reverse repurchase rate was maintained at 2% where it has been since November last year when the central bank culminated a massive easing streak to counter the pandemic’s economic repercussions.
Since then however output, while no longer shrinking at record pace, is still not out of the woods and in the first quarter disheartened many with a larger than forecast slump of 4.2%. That has left the BSP, led by its Governor Benjamin Diokno, to stay pat on its relaxed monetary policy in a meeting held a day earlier than scheduled due a public holiday.
“The Monetary Board believes that sustained support for domestic demand remains a priority for monetary policy, especially as risk aversion continues to hamper credit activity despite ample liquidity in the financial system,” Diokno said in his statement after the meeting.
Thankfully for the central bank, inflation pressures appeared to have waned since the last meeting on March 25. Consumer prices remain elevated at 4.5% average growth as of April, but BSP Deputy Governor Francisco Dakila Jr. said that at least now, inflation is seen closing the year within target.
From 4.2% seen last March, inflation is now projected to settle at 3.9%, just a tad lower from the high-end of the 2-4% official target. Pork prices continued to drive overall costs, but government fixes such as price ceilings as well as expected imports to replenish tight supplies are believed to be sufficient in addressing the problem.
On top of that, the peso, which on Wednesday closed anew on 47-range to a dollar, has firmed up, tempering import costs that tend to trickle down to inflation. On the flip side, rising global prices from food to oil bears watching as they could inflation.
At least on BSP’s part though, it does not expect these global price developments to materially affect inflation until 2022, when it should settle at 3%, up from March’s outlook of 2.8%. That would still be well within goal though, and Dakila said with vaccinations poised to finish this year as government anticipates, a “complete lift off” of pandemic restrictions is on the cards in 2022, and with it a full rebound to growth.
For some analysts, disappearing inflation concerns should open up opportunities for BSP to deploy a larger stimulus. This could be done either by bringing down the policy rate to lower banks’ average loan rates and encourage borrowing, or by freeing up more resources through reduced reserves currently pegged at 12%, one of Southeast Asia’s highest.
As it is, BSP said last year’s cuts of 200 basis points each in rates and reserves have already unleashed P2 trillion in liquidity to the financial system, although Dakila admitted most cash have only “gone back” to the central bank because of tepid credit appetite emanating from the hard times.
Still some observers said, the central bank may opt to hold fire for the rest of the year when it still has five meetings left to revisit policy. “Fading inflation pressures take some of the pressure off the central bank to tighten policy in the near term and we expect BSP to keep policy rates unchanged for the balance of the year,” Nicholas Antonio Mapa, senior economist at ING Bank in Manila, said in a commentary.
"Given the depth and breadth of this crisis, the Philippine recovery plan will only take shape via a concerted effort by banks and regulators to deliver credit to as many recipients as possible," he added.