BSP keeps interest rates at 2%, raises 2021 inflation forecast past target

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Metro Manila (CNN Philippines, August 12) — The Bangko Sentral ng Pilipinas has kept interest rates unchanged, saying it maintains an accommodative stance that will allow more money in the financial system as the COVID-19 pandemic continues to pummel the economy.

The policymaking Monetary Board voted to retain the key interest rate at 2%, BSP Governor Benjamin Diokno announced Thursday. Still the lowest on record, this has been the policy rate since November’s rate cut. Overnight deposit and lending rates were also retained at 1.5% and 2.5%, respectively.

Banks and other lending firms use the BSP's rates as a benchmark for pricing loans, credit cards, and deposit rates.

The announcement comes as the economy posted a growth of 11.8% in the second quarter of 2021 compared to the same period last year, pulling the Philippines out of recession. However, compared to the preceding quarter, economic output fell by 1.3%, indicating some weakness that may continue in the coming months.

“The Monetary Board also observed that the reimposition of quarantine measures to arrest the recent wave of COVID-19 infections could pose a risk to the ongoing economic recovery,” said Diokno.

The BSP chief said targeted fiscal and health interventions, particularly a faster vaccination drive, will be important in protecting public health and avoiding worse impacts on economic output.

Diokno reiterated the Board remains “keen” on sustaining monetary policy support as long as needed to help hasten the pace of economic recovery. Such stance also aims to lift domestic demand and market confidence, with credit activity hampered by investors avoiding taking risks at this time.

Inflation estimates for 2021, 2022 hiked

BSP Deputy Governor Francisco Dakila Jr. also announced upward adjustments of 0.1% to their full-year inflation forecasts for 2021 and 2022, to revised levels of 4.1% and 3.1% respectively.

The latest estimate for this year rests above the central bank’s 2-4% target band.

Dakila cited as inflation factors the higher global crude and non-oil prices, a weaker peso, and concerns over the timely arrival of pork imports.

Pantheon Macroeconomics senior Asia economist Miguel Chanco said inflation could accelerate anew for the rest of the year as the said factors “filter through to utility and transport costs.”

Chanco also noted the BSP’s estimated pace for 2022 has continued going up starting from the 2.7% pace projected in its first policy meeting this year.

“Such a hardening of the inflation picture over the next 18 months further rules out the chances of a surprise rate cut,” he said.

RCBC chief economist Michael Ricafort emphasized that managing inflation and expectations on it along with supporting economic recovery prospects is a “delicate balancing act.”

“The key local policy rate and local interest rate/bond yield benchmarks would be a function of the actual inflation trend, as well as long-term inflation estimates/expectations,” he said, noting these are mainly determined by supply-side factors better addressed by non-monetary steps.

Tighter monetary policy may slow down or even jeopardize economic growth prospects, he warned.