THE Monetary Board on Thursday decided to keep its all-time low interest rate for the last time this year, even amid the threats of upside risks to inflation coming into 2022.
In its last meeting for the year, the Bangko Sentral ng Pilipinas (BSP) maintained the interest rate on the BSP’s overnight reverse repurchase facility at 2.0 percent. The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.
This means that the BSP kept the all-time low interest rate for the entire year, keeping true to BSP Governor Benjamin Diokno’s forward guidance of keeping an accommodative monetary policy environment for “as long as possible” to support economic recovery.
The monetary policy levers were left unchanged on Thursday despite risks to the country’s inflation outlook for next year.
In the post-monetary policy meeting press conference, the BSP said they now expect inflation to average at 4.4 percent in 2021, up from their earlier projection of 4.3 percent.
For next year, the forecast was also raised to 3.4 percent from the earlier forecast of 3.3 percent.
“The latest baseline forecasts for 2021 and 2022 are slightly higher from the previous assessment round owing to the higher-than-anticipated inflation outturn in November. Nevertheless, the projected inflation path remains within the inflation target band of 2-4 percent over the policy horizon,” Diokno said.
“Average inflation is seen to settle close to the midpoint of the target range in 2023. Inflation expectations also continue to be anchored to the target level,” he added.
The governor also said that the risks to these inflation forecasts are tilted toward the upside for 2022.
Upside risks are linked mainly to the potential impact of continuing constraints on the supply of key food items and petitions for transport fare hikes. Strong global demand amid lingering supply-chain bottlenecks could also exert further upward pressures on international commodity prices.
On the other hand, Diokno said the emergence of new variants continues to pose downside risks to the outlook for growth and inflation.
“The Monetary Board observed that economic growth now appears to be on firmer ground, supported by the government’s accelerated vaccination program and calibrated relaxation of quarantine protocols. In particular, credit activity has gradually recovered in recent months, reflecting improved business activity and market sentiment,” the governor said.
“The Monetary Board sees enough scope to keep a patient hand on the BSP’s policy levers owing to a manageable inflation environment. At the same time, downside risks to the economic recovery emanate from the emergence of new Covid-19 variants as well as the potential tightening of global financial conditions,” the governor said.
“Hence, preserving ongoing monetary policy support at this juncture shall help sustain the economy’s momentum over the next few quarters,” he added.
Rizal Commercial Banking Commercial (RCBC) economist Michael Ricafort said the key local policy rates would still likely be maintained at the record low of 2 percent in the foreseeable future or for as long as necessary.
“[This is] in view of the need to maintain accommodative monetary policy to fundamentally support and sustain economic recovery prospects in the aftermath of the lockdowns earlier this year,” the economist said.
Diokno said they will continue to support the economy while keeping an eye on the potential risks to future inflation.
“The BSP stands ready to respond to potential second-round effects arising from supply-side pressures, in line with its price and financial stability objectives,” the governor said.
Image credits: Nonie Reyes