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THE Bangko Sentral ng Pilipinas (BSP) closed the year with a resumption of its “prudent pause” in monetary policy as inflation soars and optimism for the economic recovery is based on vaccine hopes.
At its last monetary policy meeting of the year, BSP Governor Benjamin Diokno announced the Monetary Board’s decision to keep the interest rate on its overnight reverse repurchase facility at 2 percent.
Interest rates on demand deposits and credit facilities also remained at 1.5 percent and 2.5 percent, respectively.
This is the last BSP monetary policy meeting of the year. Annually, the BSP holds eight meetings every six weeks. By 2020, five of these meetings were rate cuts to bolster monetary policy support for the pandemic-ravaged economy.
However, for this meeting, Diokno’s key benchmark for maintaining policy rates includes inflation and the expected pickup of the economic recovery.
Diokno said that despite the higher than expected inflation impression in November, his assessment shows that the inflationary environment remains benign.
“The latest baseline forecasts have increased slightly due to the sharp rise in world crude oil prices and higher than expected food inflation in November. However, since the increase in food prices is transitory, the future trajectory of inflation is expected to remain firmly within the government’s target of 2% to 4% over the policy horizon, ”Diokno said.
“The balance of risks to the inflation outlook is also tilting downward from 2020 to 2022, due in large part to potential disruptions to national and global economic activity amid the ongoing pandemic. Meanwhile, inflation expectations remain broadly consistent with the inflation target, ”he added.
For 2020, the BSP revised its inflation target to 2.6 percent from 2.4 percent at the November meeting. By 2021, the BSP expects inflation to reach 3.2 percent from the previous expectation of 2.7 percent. Meanwhile, it kept its expectation unchanged at 2.9 percent for 2022.
At the virtual press conference on monetary policy, BSP deputy governor Francisco Dakila said that the main factors involved in the review were the rise in world oil prices and pressure from the supply side on the food front .
The BSP also said that while there is a resurgence of Covid-19 cases in some parts of the world, optimism about vaccine delivery has raised market confidence and improved prospects for global growth.
The optimistic attitude of the BSP also depended on the first signs of better mobility and sentiment on the local front.
“While recent natural calamities could spell strong headwinds for growth, further relaxation of quarantine measures should help facilitate the economy’s recovery in the coming months,” Diokno said.
Pause instead of stop
The BSP has already aggressively cut its interest rates for the year to support the economy.
In total, the Central Bank has already cut its rates by 200 basis points: 25 basis points in February, 50 basis points in March, another 50 basis points in a meeting of the Monetary Board outside of the planned in April, another cut of 50 basic points. in June and the latest 25 basis point cut last month.
At this meeting, Diokno reiterated that he remains committed to deploying the BSP’s “full range of instruments” as needed in fulfillment of its mandate to maintain financial and price stability conducive to growth.
“The Monetary Board believes that an accommodative monetary policy stance, coupled with sustained fiscal initiatives to ensure public welfare, should accelerate the economy’s transition to a sustainable recovery,” Diokno said.
Lieutenant Governor Dakila also highlighted the importance of maintaining accommodative monetary policy. He said that the BSP is expected to maintain its accommodative monetary policy until it sees solid signs of economic recovery. He said the withdrawal of their support will be carefully considered.
