BSP keeps interest rates at 2% with PH still in recession, projects inflation to stay within 2021 target

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Metro Manila (CNN Philippines, May 12) — The Bangko Sentral ng Pilipinas is keeping interest rates at an all-time low, hoping continued low borrowing costs will drive economic activity and crawl out of recession this year.

The Monetary Board decided to retain the key interest rate at 2%, BSP Governor Benjamin Diokno announced Wednesday. This rates continues to be the lowest on record, sustaining the surprise rate cut made in November last year.

The central bank's overnight deposit and lending rates likewise stayed at 1.5% and 2.5%, respectively.

Diokno’s announcement comes as the Philippine economy contracted further by 4.2% in the first quarter of 2021 after a sharper 8.3% plunge three months prior. 

Banks and other lending firms look at the BSP's rates as their benchmark in pricing loans along with credit card and deposit rates.

The country's main economic hub Metro Manila shifted to tighter quarantine rules beginning in late March along with key neighboring provinces Bulacan, Cavite, Laguna and Rizal, which further dampened business and consumer activity.

"Looking ahead, the BSP affirms that maintaining an accommodative stance should quicken the economy's transition toward a sustainable recovery," the central bank chief said.

Inflation forecast for 2021 downscaled, 2022 projection hiked

After announcing revised projections last March, the BSP once again adjusted its inflation forecasts for 2021 and 2022 this May.

BSP Deputy Governor Francisco Dakila Jr. said they now expect a 3.9% rate for this year, slower than the previous 4.2%. The new figure now falls within the 2-4% inflation target for 2021.

Dakila cited the downscaling to lower tariffs on imported pork, "lower-than-expected" inflation for March and April, the country's first-quarter GDP figure and its implications on economic activity for the first half of 2021, and the continued appreciation of the peso for the updated forecast.

Meanwhile, the inflation forecast for 2022 had been hiked to 3% — right in the middle of the target range for the year — from the 2.8% previously announced by Dakila.

"This can be attributed to the impact of increases in global crude oil prices, as well as faster prospects for domestic economic growth for next year," he explained.

Average inflation currently stands at 4.5%, the same figure logged for March and April. This outturn is "consistent" with the BSP's projected path that inflation will remain elevated for the first quarters of 2021 but will revert within target in the last quarter, Dakila added.

When asked about whether the BSP's downward revision of its inflation forecast for this year means the unwinding of liquidity measures will begin soon, Dakila said the "normalization process will be data-dependent." The central bank will also await for further information and signs that economic growth is finally strong and sustainable first, he added.

"The latest revision to the inflation forecast validates the current monetary stance with expectations for a rate hike set aside for now," said ING Bank senior economist Nicholas Antonio Mapa in a market note, likewise projecting inflation to slow down in the months ahead as the central bank keeps the 2% policy rate for the rest of the year.