February 18, 2022 | 00:00
MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) left interest rates unchanged yesterday, as widely expected, but the window of accommodation to support a sustained economic recovery is rapidly closing as authorities signal inflation risks due to possible second-round effects of rising global oil prices.
BSP Governor Benjamin Diokno told a virtual press conference that the Monetary Council had decided to keep the interest rate of the central bank’s overnight repo facility at a record low. by 2%.
Interest rates on deposit and overnight lending facilities were also maintained at 1.5% and 2.5%, respectively.
The central bank has kept interest rates at record highs for 10 consecutive monetary policy meetings, or since November 2020, when it last announced a 25 basis point cut.
“Overall, the Monetary Board considers it prudent to maintain the accommodative BSP policy stance, given a manageable inflation environment and emerging uncertainty surrounding domestic and global growth prospects,” Diokno said. .
The PASB chief also said that the national economic recovery has continued to gain momentum thanks to the government’s ongoing vaccination program and the easing of mobility restrictions.
But Diokno warned that high global commodity prices, heightened geopolitical tensions and the uneven pace of vaccinations between countries could dampen prospects for a global economic recovery.
“Looking forward, given stronger signs of recovery in output growth and labor market conditions and improvements in domestic financial markets, PASB will continue to carefully develop its plans for the eventual normalization of its extraordinary liquidity measures when conditions warrant, consistent with our price stability and financial stability mandates,” he said.
According to Diokno, inflation projections have risen slightly, reflecting the impact of rising domestic food inflation and global oil prices.
“Risks to the inflation outlook continue to lean slightly to the upside for 2022 but remain broadly balanced for 2023,” Diokno said.
The head of PASB reiterated that the implementation of non-monetary measures to ensure adequate supply of key food items should be maintained to ease supply-side pressures on inflation.
Diokno stressed that the increased volatility in international oil prices warrants close monitoring and appropriate interventions if necessary in order to stop potential side effects.
BSP chief executive Zeno Ronald Abenoja said the Monetary Council had raised its inflation forecast to 3.7 from 3.4% for 2022 and to 3.3 from 3.2% for 2023, but these remain manageable and within the government’s 2-4% target.
Abenoja attributed the upward revisions to the forecast to higher global crude oil prices as well as non-oil prices which could affect domestic inflation.
He said global oil prices are now expected to average $83 a barrel, up $10 from the $73 a barrel used to set the forecast last December.
Authorities expect global oil prices to ease in the future due to expectations of higher supply.
On the path of the consumer price index (CPI), the BSP official said inflation is expected to accelerate above the 2-4% target in the second quarter, before returning to the range in the second quarter of this year until next year.
Abenoja said domestic economic activity continues to gain momentum, but downside risks remain elevated due to the lingering effects of the pandemic with the emergence of the more contagious Omicron COVID-19 variant.
“Over the medium term, the economy is expected to reach pre-pandemic levels by the third quarter of 2022,” Abenoja said.
ING Bank Senior Economist Nicholas Mapa took note of Diokno’s tone on the expected normalization.
“This is the first time that Diokno has mentioned its exit strategy this year and suggests that a potential rate reversal is being considered,” Mapa said.
He said Diokno also mentioned that the economic recovery was gaining ground, although monetary authorities admitted that downside risks to the growth outlook remained.
“BSP also indicated that policy normalization may begin after recording four quarters of GDP growth. Thus, we believe the trigger point for a potential rate reversal should be tied to a strong economic recovery coupled with peso depreciation pressure,” Mapa said, adding that the Dutch financial giant expects a rate hike towards the end of the second quarter.
Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said policy rates would likely be kept at record highs for the foreseeable future, or as long as needed, given the need to maintain accommodative monetary policy to support fundamentally and support the prospects for economic recovery.
However, Ricafort said the US Federal Reserve has become more hawkish recently as it signaled more and earlier rate hikes, after doubling the pace of taper bond purchases.
“Going forward, any potential local policy rate hikes would likely follow any Fed rate hikes from 2022 to 2024, which could begin in the latter part of 2022, with the start of the Fed rate hike as early as March. given the need to maintain comfortable interest rate differentials with the United States and other developed countries,” said Ricafort.