BSP gets more leeway to keep rates low as Sept inflation eases


WITH inflation slightly easing in September, the Bangko Sentral ng Pilipinas (BSP) has been afforded more space to keep its record-low monetary policy rates accommodative to support the recovery of the local economy.

In his statement after the Philippine Statistics Authority’s (PSA) inflation print announcement on Tuesday, BSP Governor Benjamin Diokno reiterated his policy guidance of keeping interest rates low for as long as possible.

“The BSP stands ready to maintain its accommodative monetary policy stance for as long as necessary to support the economy’s sustained recovery to the extent that the inflation outlook would allow,” Diokno said.

Inflation in September hit 4.8 percent. While this is still above the annual target range of 2 to 4 percent, it is a deceleration from the 4.9 percent print in the previous month. It also sits at the lower end of Diokno’s forecast range of 4.8 to 5.6 percent for the month.

The governor also said the upward pressure on inflation, such as weather disruptions, global oil prospects, and continued impact of the African Swine Fever (ASF), are supply-side shocks that are best addressed by non-monetary policy interventions.

“The return of inflation to the target range is highly contingent on the successful implementation of these supply measures,” the governor said.

The BSP chief also said the risks to the inflation outlook remain tilted towards the upside for the remaining months of 2021, but remain broadly balanced for 2022 and 2023.

The governor expressed confidence that monthly inflation will decelerate to within the target range by the end of the year.

ING Bank economist Nicholas Mapa said the BSP is expected to keep policy support for “just a bit longer” to help provide enough lift for escape velocity from the prolonged downturn.

“The latest inflation reading gives the Bangko Sentral ng Pilipinas [BSP] a little more space to maintain its accommodative stance. Pressure has been building on the BSP to hike prematurely but the surprise inflation print helps the Central Bank justify its current stance,” Mapa said.

Rizal Commercial Banking Corporation (RCBC) economist Michael Ricafort also said he expects the BSP to keep its rates accommodative.

“For the coming weeks or months, any further monetary policy accommodation measures, especially any further cut in large banks’ reserve requirement ratio [RRR], remain possible, especially if inflation stabilizes further,” Ricafort said.

While easing policy rates at this juncture is off the table, Ricafort said cutting the banks’ RRR could be one of the BSP’s responses to the recent heightened restrictions in Metro Manila, as the economy needs all the support measures that it could get at this time.

The Bank of the Philippine Islands (BPI), meanwhile, said keeping interest rates at this level will become “more and more difficult” for the BSP.

“The real policy rate has been negative for 15 months already. This was made possible without any severe trade-offs so far given the accommodative stance of the Federal Reserve. But with the US central bank gradually becoming hawkish, keeping interest rates at this level will become more and more difficult,” BPI said in a research note.

“Something else will adjust if the policy rate is kept at 2 percent, and most likely that will be the exchange rate,” it added.

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