BSP keeps rates unchanged, but pressure to increase amounts

MANILA, Philippines — The Bangko Sentral ng Pilipinas kept its ultra-loose monetary policy unchanged on Thursday, but pressure to start tightening is mounting as high oil prices fuel inflation, while central banks in developed economies began its takeoff.

At its meeting, the seven-member Monetary Board decided to leave the overnight reverse repurchase facility rate unchanged at a record low of 2%, while demand deposit and lending facility rates have remained unchanged. at 1.5% and 2.5%, respectively.

Banks often use the BSP policy rate as a base when charging interest on loans. The key rate has not changed since November 2020, when the central bank ended an aggressive easing episode aimed at stimulating credit and consumption growth in the pandemic-hit economy.

In deciding to hold, BSP Governor Benjamin Diokno emphasized the need to foster the nascent recovery in the economy which, he said, “has gained further traction with the relaxation of remaining mobility restrictions”.

But the BSP chief acknowledged that the central bank’s room to maintain its easy-money policy is narrowing by the day, not thanks to the rise in oil prices caused by the war between Russia and Ukraine, which could trigger a rise in prices of key consumer items. The BSP took this into account in its decision by raising its base inflation forecast for this year to 4.3% from 3.7% previously. If realized, the BSP will never reach its 2-4% annual target again.

The US Federal Reserve also raised rates this month for the first time since 2018 to cool US inflation, adding pressure on central banks in emerging economies to do the same and stem capital flight. .

In a Bloomberg interview last week, Diokno said the central bank still plans to start its rate-hike cycle in the second half. But for now, the BSP believes that supporting the economic recovery should take precedence over fighting inflation.

“Overall, the Monetary Board sees room to maintain the BSP’s policy settings to safeguard the momentum of the economic recovery amid heightened uncertainty, even as it continues to develop its plans for the gradual normalization of its extraordinary liquidity measures.” Diokno said at a news conference.

Indeed, Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said the BSP is likely to keep its accommodative monetary policy unchanged this year despite the threat of inflation.

“We highly doubt that an average inflation forecast above the 4% upper limit of the BSP’s target range is a sign that the Board is eager to raise rates. Remember that the headline rate spent almost all of last year above the 4% and members barely budged,” Chanco wrote in an emailed comment.

“Overall, we maintain that the BSP will be one of the few central banks in the region that is not likely to start normalizing monetary policy this year. Governor Diokno was quite explicit during the Q&A session that he would prefer the government to take action ‘non-monetary’ “interventions to deal with current inflationary pressures. Furthermore, the size of the Philippine economy remains below the pre-pandemic picture, let alone the pre-COVID trend,” he added.

Rate of increase-RRR tandem cut?

In the same press conference, Diokno said that the BSP will not abandon its plan to further reduce the reserve requirement ratio (RRR) of banks which, he said, could take place “in the second half of the year”. The RRR cut would give banks more money to lend and reduce the holdings of cash they keep in their vaults as reserve funds that don’t earn returns.

If this happens, the RRR cut is likely to work in conjunction with the BSP rate hikes, which have the opposite effect of tightening the money supply. Nicholas Antonio Mapa, senior economist at ING Bank in Manila, sought comment, saying the BSP should “tread carefully.”

“Lowering the RR while raising rates was a strategy that was last employed in 2018. The result back then was that the peso went into free fall (down 9%) and inflation exceeded 5%,” he said. Map in a Viber message.

“With BSP already likely behind the curve, a compensatory RRR cut during a time when hikes are needed could result in a similarly non-ideal situation. Be careful, BSP,” added Mapa.

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