BSP, now seeing inflation at the target's ceiling, holds fire
MANILA, Philippines (UPDATE 5:34 p.m., Feb. 11) — Policy rates were kept steady as expected on the central bank’s first rate-setting meeting for the year that came against the backdrop of roaring prices that narrow the space for further stimulus to assist pandemic recovery.
The policymaking Monetary Board, led by Governor Benjamin Diokno, kept overnight borrowing rate at a record-low of 2%, at the middle of overnight deposit and lending facilities at 1.5% and 2.5%.
Banks’ mandated reserves were also left untouched at 12% of total deposit liabilities.
The decision to maintain monetary policy echoed Diokno’s pronouncements last month as well as that of Monetary Board member Felipe Medalla few days ago, and appears to balance the need to keep a weakened economy liquid, while avoiding to fan inflation that already hit a 2-year peak of 4.2% because of tight food supply.
Indeed, Diokno on Thursday dropped the word “transitory” from his official statement, saying that prices are now expected to remain “elevated” in the next few months. Yet ultimately, he said inflation should settle within the 2-4% target this year. It will, as per BSP’s latest forecast, but only to hit the ceiling of 4% by yearend.
“The balance of risks to inflation outlook now appears to be broadly balanced,” Diokno said. In at least previous three meetings, BSP saw “downside” risks to inflation which essentially meant price increases would have been tamer than forecast.
Still, BSP Deputy Governor Francisco Dakila Jr. underscored that whatever uptick in prices this year should slow down in 2022 when inflation is seen to average 2.7%, slower than the 2.9% forecast in December.
“This is indicative of nature of the pressures on inflation that they come from supply side and therefore should be transitory,” Dakila said in a briefing.
Analysts are divided as to what BSP would do next. Nicholas Antonio Mapa, senior economist at ING Bank in Manila, said last year’s rate cut cycle had “concluded.” Ruben Carlo Asuncion of UnionBank of the Philippines agreed with this assessment.
“I think that the BSP will hold on its policy rate for quite some time…Inflation may stay elevated, but it seems BSP is sticking to its monetary policy guns,” Asuncion said in a text message.
But Alex Holmes, Asia economist at Capital Economics, believes another round of reduction remains on the table especially with economy still struggling to gain pace.
“A failure to contain the virus, economic scars from the pandemic and lackluster fiscal support mean the recovery will continue to underwhelm in the quarters ahead,” Holmes said in a commentary.
“The upshot is that while the current trend in inflation is likely to delay the central bank from easing further, it is unlikely to stop it,” he added.
What is clear for now at least is that the recent inflation spike has given BSP time to see previous cuts to make their way to the economy. The central bank did say that those easing helped release P2 trillion in fresh funds to the economy, but the full impact typically has a lag.
As it is, BSP’s stimulus has yet to deliver on returns. Bank lending contracted for the first time in 14 years as of end-December despite low rates that should have encouraged more borrowing, while lenders tightened criteria for lending, effectively shutting the door for credit to facilitate economic activity. Demand is subdued even as inflation is accelerating.
“Supply-side shocks on inflation are more appropriately met by direct measures that address the causes of supply limitations…They need not be met by monetary policy action,” Dakila said.
Editor's note: Updated with comments from analysts and BSP
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