The Bangko Sentral ng Pilipinas (BSP) decided to pause its aggressive monetary policy tightening campaign as it believes that inflation is now “firmly on track” to hit the government’s target.
This meant that the Monetary Board (MB) kept the prevailing interest rates on BSP’s overnight reverse repurchase facility at 6.25 percent. The interest rates on the overnight deposit and lending facilities were also maintained at 5.75 percent and 6.75 percent, respectively.
The BSP also said maintaining interest rates are expected in the near-term and that monetary authorities are “unlikely to raise [and will also be] reluctant to cut” interest rates at least in the next 2 to 3 policy rate settings.
“If the current forecast is maintained, we are unlikely to raise [rates] but also reluctant to cut because the problem is if the US is raising policy rates and we are cutting, the market seems to see that as a trigger for a significantly weaker peso,” BSP Governor Felipe M. Medalla said in a press briefing on Thursday.
“For some reason, the market seems to think that the policy
rate differential of 100 to 125 basis points is what can lead to a more stable peso or more or less not making the dollar too strong relative to the peso,” he added.
Given this, the BSP expressed its willingness to cut the reserve requirement (RR) ratio by 200 basis points next month. The “ideal time” to do this, Medalla said, is on June 30 when BSP’s pandemic policies are set to expire.
During the pandemic, the BSP allowed banks to use loans to MSMEs not affiliated with conglomerates as alternative compliance with the reserve requirements against deposit liabilities and deposit substitutes. This arrangement expires next month.
“If we do not cut the RR, unless we do something about it, we tend to tighten monetary conditions because right now, loans to medium- and small-scale industries qualify as reserves until the end of June. So if we do not extend that policy, then we must offset it by cutting reserve requirements,” Medalla said.
The BSP has already raised policy rates by 425 basis points since last year. This is the first pause that was implemented since the MB started monetary tightening to cool inflation.
Inflation has already slowed to 6.6 percent in April, according to the latest data released by the Philippine Statistics Authority. However, core inflation remains elevated at 7.9 percent during the period.
The BSP now expects inflation to average 5.5 percent this year, lower than the February estimate of 6.1 percent. The increase in commodity prices is also expected to average 2.8 percent in 2024, slower than the 3.1 percent estimate made in the last monetary policy report.
The central bank expects inflation to remain elevated in the coming months but will return to the target range by the last quarter of 2023. However, there are still risks to inflation including the weak to moderate El Niño that is expected to hit the country in June to August this year and remain until early 2024.
In an interview with BusinessMirror on the sidelines of the Asian Development Bank (ADB) Annual Governor’s Meeting earlier this month, Medalla flagged the “severity” of the expected El Niño to be a greater factor to consider in terms of its impact on inflation. (https://businessmirror.com.ph/2023/05/04/bsp-flags-el-ninos-inflation-impact/)
“Now, what we’ve done is the baseline forecast that was earlier announced does not yet take into account the 10 basis point possible impact of El Niño. But rather, the potential effect of El Niño is included in the risk matrix that we have. It’s an upside risk to the inflation outlook,” BSP Deputy Governor Francisco Dakila Jr. said during the briefing.
The MB also noted that while GDP growth has remained robust in the first quarter, demand indicators have also pointed to a potential moderation in recent months, suggesting that previous policy rate increases by the BSP continue to work their way through the economy.
Moreover, the MB is encouraged by the recent mounting of whole-of-government actions to ease constraints on food supply.
Moving forward, the BSP said it will continue to monitor developments affecting the outlook for inflation and growth. The BSP said it is ready to resume monetary tightening as necessitated by emerging data, consistent with its primary mandate to promote price and financial stability.
