BSP maintains interest rates at 2% with PH still in recession, says inflation 'likely to remain elevated'

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Metro Manila (CNN Philippines, February 11) — The Bangko Sentral ng Pilipinas is keeping key interest rates at an all-time low, in hopes of revving up economic activity through lower borrowing costs via an accommodative policy stance.

In its first policy meeting for 2021, the BSP's Monetary Board voted on Thursday to retain the key interest rate at 2%, unchanged from a surprise cut last November. This is still the lowest on record as the local economy stays in recession owing to weak demand being hamstrung by quarantine restrictions declared by the government to curb the spread of COVID-19.

Banks and other lending firms rely on the BSP's rates as their benchmark in pricing loans, credit card, and deposit rates.

Rates for BSP overnight deposit and lending facilities likewise were kept steady at 1.5% and 2.5%, respectively.

The central bank's announcement comes after the Philippine economy suffered its worst contraction last year, dropping by 9.5% due to the pandemic.

BSP Governor Benjamin Diokno noted during the policy briefing that while improvements have been observed in public mobility and confidence, new variants of COVID-19 and possible setbacks in the government's vaccine rollout continue to dampen economic growth and recovery prospects.

Economic officials have been counting on eased quarantine rules and age restrictions to further boost recovery, hoping that private spending will drive economic growth. Most of the country is under modified general community quarantine, with some areas like economic hub Metro Manila remaining under the stricter GCQ.

Inflation ‘likely to remain elevated,’ 2021 print revised

Diokno also said inflation is "likely to remain elevated in the coming months." This reflects the effect of current constraints on supply pushing up major food commodity prices, he added.

Prices of basic goods accelerated in January by 4.2%, above the central bank's 3.3-4.1% forecast range. The latest pace of price increases is also the fastest in almost two years. 

BSP Deputy Governor Francisco Dakila Jr. announced the revision of the agency's inflation forecast for this year from the 3.7% projection announced in 2020.

"Given the latest developments, whereas we know there were supply-side pressures on inflation, we had revised the 2021 number to 4.0%," he said.

Diokno said tighter meat supply following the African Swine Fever outbreak in the Philippines could further cause upside pressures on consumer prices, but the global health crisis might keep posing downside risks both on demand and inflation outlook.

"On balance, the Monetary Board is of the view that the manageable inflation outlook continues to allow the BSP to maintain an accommodative policy stance and thus complement crucial fiscal policy measures in supporting economic activity and market confidence," he said.

The central bank likewise expressed its support for agencies implementing non-monetary interventions geared towards ensuring Filipinos can access "internationally competitively priced food and thereby mitigate the impact of supply-side factors on inflation." He was referring to the green light given to tax-free pork imports that are aimed at offsetting the drop in domestic supply.