THE Bangko Sentral ng Pilipinas (BSP) decided to keep all monetary policy levers steady in its first policy meeting for 2021, as inflation is now expected to reach the ceiling of the government’s target band for the year.
BSP Governor Benjamin Diokno announced to the press on Thursday that the Monetary Board decided to maintain the interest rate on the BSP’s overnight reverse repurchase facility at 2 percent. The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.
This marks the second consecutive meeting that the BSP decided to hold its monetary policy easing measures. Since the start of the pandemic, the BSP has been on an aggressive cutting mode to support the economy through the crisis brought about by pandemic-induced movement restrictions.
Several economists had forecast a pause in the BSP’s cutting in the Central Bank’s first monetary policy meeting of 2021, after inflation accelerated faster than expected at 4.2 percent in January.
In his press briefing on Thursday, Diokno said inflation will likely remain elevated in the coming months due to the impact of supply constraints on domestic prices of key food commodities such as meat and vegetables, as well as the recent uptick in international oil prices.
Inflation forecasts revised
According to BSP Deputy Governor Francisco Dakila, the BSP now expects inflation to hit an average of 4 percent for 2021, up from their previous forecast of 3.2 percent.
This means that inflation is expected to hit the ceiling of the government’s 2 to 4 percent target range in 2021.
Dakila, however, insisted that the drivers of the relatively elevated inflation forecasts largely emanate from the supply side and are thereby deemed “transitory” by the BSP.
For 2022, the BSP revised its inflation forecast downward from 2.9 percent to 2.7 percent as supply-side inflation influences will start to subside.
“As I have already noted for the next few months, inflation can remain elevated, but we do emphasize that this is of a transitory nature and inflation is expected to go back to within-target range towards the latter part of the year. So by 2022, the outlook for inflation has actually been revised downwards in line with base effects. So that meant that the monetary policy stance, in the judgment of the board, remains appropriate,” Dakila said.
Asked about the implication of a “transitory elevated inflation” on monetary policy, Dakila said a supply-side-induced inflation acceleration is best dealt with direct and non-monetary policy measures from other government agencies.
“On the implications of this for monetary policy decisions. Well, that is already demonstrated in the action of the board for this meeting. We know that supply-side shocks on inflation are more appropriately met by direct measures that do address the causes of supply limitations. Therefore, we are also coordinating with other government agencies. In this case, those measures should be targeted at normalizing the supply of meat in the market. They need not be met by monetary policy actions,” Dakila said.
In a commentary on the BSP’s latest move to maintain all monetary policy levers, ING Bank economist Nicholas Mapa said the BSP’s move is “optimal” to continue supporting the economy without stoking any more inflationary pressures.
“BSP officials are cognizant of the ills of high inflation, but they are also fully aware that any rate hike would have little to no impact on the price of pork or vegetables—the two main sources of the breach. Furthermore, a rate hike at this junction would snuff out what little growth momentum is left in the economy and torpedo the recovery. Thus, resisting the knee-jerk reaction to hike in response to the inflation breach was likely the optimal decision at this point,” Mapa said.
“This ‘non-move move’ allows BSP to support growth for a bit longer but at the same time set up a possible reversal in stance but only should second-round effects become apparent. We expect BSP to retain its accommodative stance in the medium term to support the recovery and only consider a reversal should second-round effects surface,” he added.
On balance, Diokno maintained confidence that inflation will remain manageable on the policy horizon.
“The Monetary Board is of the view that the manageable inflation outlook continues to allow the BSP to maintain an accommodative policy stance and thus complement crucial fiscal policy measures in supporting economic activity and market confidence,” Diokno said.
“The Monetary Board likewise reiterates its support for urgent and coordinated efforts with government agencies in implementing non-monetary interventions to enable all Filipinos access to internationally competitively priced food and thereby mitigate the impact of supply-side factors on inflation,” he added.
Diokno also reiterated his readiness for further policy action, saying that the BSP “remains firm in its intent to take appropriate measures to ensure that the monetary policy stance continues to support the recovery of the economy, consistent with its price and financial stability mandate.”
