THE recent plateau in the country’s inflation numbers could free up some space for the Bangko Sentral ng Pilipinas (BSP) to hold record-low interest rates for as long as possible before it starts tightening monetary policy.
The May inflation is a steady imprint, unchanged from the 4.5 percent inflation rate in March and April, and within the BSP’s forecast range for the month.
ING Bank Manila economist Nicholas Mapa believes that the flat inflation in the last three months signals a downtrend in the coming months and will give the BSP monetary policy space to “extend its pause” of its accommodative stance.
“Above-target inflation constrains [BSP Governor Benjamin Diokno] from cutting policy rates further while the disappointing first quarter gross domestic product (GDP) reading is likely enough to convince Diokno that rates should stay where they are for now. With bank lending in negative territory for 5 months and counting, it’s clear that the banking sector is still in need of stimulus from monetary authorities,” Mapa said.
“Inflation will likely decelerate in the coming months as supply conditions ease with inflation set to return within target by as early as July. We expect BSP to extend its pause for the balance of the year while penciling a possible rate hike by third quarter 2022 as economic conditions improve considerably,” he added.
Rizal Commercial Banking Corporation (RCBC) economist Michael Ricafort, meanwhile, said further monetary policy accommodation measures, especially a further cut in banks’ reserve requirement ratio (RRR), remain possible, especially as inflation stabilizes.
“[This is] as the economy needs all the support measures that it could get at this time largely due to the adverse economic effects of the Covid-19 lockdowns/pandemic, amid the lack of additional funding for more fiscal stimulus measures, thereby making more accommodative monetary policy measures possible to help improve prospects of economic recovery, going forward,” Ricafort said.
On the other hand, Bank of the Philippine Islands (BPI) economists said in a commentary that the upside risks to inflation are still “significant,” and it might lead to adjustments in monetary policy in the coming months.
“To demonstrate its determination to keep core inflation from consistently breaching the headline target, the monetary authorities may recalibrate the policy rate later this year to maintain its independence and credibility,” BPI said.
“Inflation consistently breaching the 4-percent target can erode the confidence of financial market participants, especially considering the substantial gap between inflation and the policy rate,” it added.
The Monetary Board is expected to convene on June 24 to decide on their next monetary policy move. This will be the fourth monetary policy meeting of the BSP for the year.