BSP keeps interest rates unchanged at 2%, expects 2021 inflation to be further above target

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Metro Manila (CNN Philippines, September 23) — The Bangko Sentral ng Pilipinas kept interest rates at their all-time low on Thursday in a bid to spur economic activity.

In a virtual briefing, BSP Governor Benjamin Diokno confirmed the Monetary Board’s decision to keep policy rates at 2% — the lowest so far. This is the seventh meeting the body did away with adjusting the numbers.

The board also retained overnight deposit and lending rates at 1.5% and 2.5%, respectively.

The central bank’s rates serve as a benchmark for pricing loans, credit card, and deposit rates for banking institutions and lending companies.

The latest announcement – which was heavily expected by economists – has prompted them to project the BSP will maintain its current accommodative stance, with some writing off rate hikes possibly until end-2022.

“[W]ith the economy likely to remain depressed for some time, but inflation set to fall back soon, the central bank will look to keep monetary policy supportive for some time to come,” said Capital Asia emerging Asia economist Alex Holmes, citing the economy’s 1.3% quarter-on-quarter contraction this April to June on a seasonally adjusted basis.

ING Bank senior economist Nicholas Antonio Mapa, meanwhile, warned hiking rates at this point in time may be sufficient to “send the Philippines spiraling into a full blown economic depression.”

2021-2023 inflation forecasts hiked

BSP Deputy Governor Francisco Dakila Jr. also announced the body’s revised full-year inflation forecasts until 2023.

This 2021, they now expect inflation to average 4.4% — up from the institution’s prior 4.1% forecast and further above its 2-4% target band for the year. The Monetary Board said “risks to the inflation outlook have tilted towards the upside” for the remainder of 2021.

An inflation rate above 5% is “possible” this September, added Dakila as he cited factors such as higher suggested retail prices on basic goods, price hikes in domestic petroleum products, higher Meralco rates and the possible impact of typhoons.

In August, inflation zoomed to 4.9% from 4% in July, the first and only time the figure fell within target range this year.

The BSP likewise expects the rate at which prices of basic goods increase to decelerate within its target band by November, he added.

The central bank also forecasts that inflation will settle at 3.3% in 2022 and 3.2% in 2023. Its previous projection was a 3.1% average for both years.

“On balance, the Monetary Board is of the view that prevailing monetary policy settings remain appropriate given the manageable inflation environment and uncertain growth outlook,” said the Board, which encouraged the enactment of “appropriate” fiscal and health interventions to help support economic recovery amid the pandemic.