The policy-making Monetary Board of the Bangko Sentral ng Pilipinas on Thursday kept its benchmark interest rate unchanged at 6.5 percent, effectively validating market consensus of a pause in a yearlong tightening cycle to combat inflation.
“At its meeting on monetary policy today, the Monetary Board decided to keep the interest rate on the BSP’s overnight reverse repurchase facility at 6.25 percent. Accordingly, the interest rates on the overnight deposit and lending facilities were kept at 5.75 percent and 6.75 percent, respectively,” the BSP said.
It said new information and its assessment of the impact of previous monetary policy actions, the Monetary Board decided that a pause in monetary policy tightening was appropriate.
According to the BSP, latest baseline projections continue to reflect a gradual return of inflation to the target band of 2 to 4 percent over the policy horizon.
Average inflation this year is now projected at 5.5 percent, lower than 6 percent previously, while the average inflation forecast for 2024 fell slightly to 2.8 percent. Inflation expectations next year and in 2025 are steady and within the target range.
The Monetary Board also noted that while GDP growth has remained robust at 6.4 percent in the first three months this year, demand indicators have also pointed to a potential moderation in the recent months, suggesting that previous policy rate increases by the BSP continue to work their way through the economy.
The Monetary Board acknowledged being encouraged by the recent mounting of whole-of-government actions to ease constraints on food supply.
It noted that even as headline inflation continued to decelerate with slower increases in the prices of food and energy-related items, core inflation has only eased marginally. In addition, the balance of risks to the inflation outlook remains largely tilted towards the upside owing to persistent constraints in the supply of key food items, the potential impact of El Niño on food prices and utility rates, as well as the effects of possible additional adjustments in transport fares and wages. Meanwhile, the impact of a weaker-than-expected global economic recovery continues to be the primary downside risk to the outlook, the BSP said.
Given these considerations, the Monetary Board deems it prudent for the BSP to take a pause in monetary policy tightening while remaining ready to respond to emerging threats to inflation. The Monetary Board also deems it necessary to keep the policy interest rate at its current level over the near term, as ongoing price pressures continue to warrant close monitoring. A prudent pause also allows monetary authorities to further assess how macroeconomic and financial conditions will evolve in view of tighter global financial conditions, the BSP said.
There have been those who argue that a pause in the monetary tightening cycle at this point is fraught with risks in that the signal could be taken as “going easy against inflation” considering that while inflation in recent months have moderated, the rate at which prices change remain elevated at this point.
Inflation in April averaged lower to 6.6 percent from 7.6 percent in March, way above the official target ranging from 2 percent up to only 4 percent.
Food inflation averaging 7.9 percent in April, while lower than 9.3 percent in March, remains elevated and forecast to remain so in the next few months.
