BSP decides to pause monetary policy tightening

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Thursday decided to take a pause in its monetary policy tightening, after raising the policy rates by a cumulative 425 basis points since May 2022.

The Monetary Board of the BSP has already hiked key policy rates by 425 basis points since May 2022, with the latest being a 25-basis point increase that took effect on March 23 to bring the benchmark rate to 6.25%. 

Following its policy meeting, BSP Governor Felipe Medalla said that while inflation expectations remain tilted to the upside, forecasts for this year and the next have been revised downward with a deceleration seen for the rest of the year.

“Based on the sum of new information and its assessment of the impact of previous monetary policy actions, the Monetary Board decided that a pause in monetary policy tightening was appropriate,” he said at a press conference in Manila City.

The key rate for the overnight deposit facility was kept at 5.75%, the overnight borrowing facility at 6.25%, and the overnight lending facility at 6.75%, which were implemented on March 24, 2023.

Inflation, the rate of increase in the prices of goods and services, is now seen to average 5.5% this year, slower than the 6.0% projected during the March meeting. Potential drivers include the potential impact of El Niño on food prices and utility rates, and the possible additional adjustments in transportation fares and wages.

The inflation forecast for 2024 was also lowered to 2.8% from 2.9%, on expectations of lower food and oil prices.

The Monetary Board of the BSP has already hiked key policy rates by 425 basis points since May 2022, with the latest being a 25-basis point increase that took effect on March 23 to bring the benchmark rate to 6.25%.

“Demand indicators have also pointed to a potential moderation in the recent months, suggesting that previous policy rate increases by the BSP continue to work their way through the economy,” Medalla said.

“Moreover, the Monetary Board is encouraged by the recent mounting of whole-of-government actions to ease constraints on food supply,” he added.

Inflation clocked in at 6.6% in April, marking the third straight month of deceleration from the peak of 8.7% recorded in January.

Moving forward, Medalla said the pause in tightening could last for the next two to three policy meetings, should inflation continue to be within the projections.

“The Monetary Board also deems it necessary to keep the policy interest rate at its current level over the near term, as ongoing price pressures continue to warrant close monitoring,” he said.

“A prudent pause also allows monetary authorities to further assess how macroeconomic and financial conditions will evolve in view of tighter global financial conditions,” he added. 

Economists now anticipate the BSP to cut rates moving forward, as the BSP said inflation is expected to average 7.2% in the first half of 2023, before slowing to 4.6% in the third quarter and 3.0% in the fourth quarter.

“The upshot is that today’s hike was probably the last of the cycle. We now think there will be a short pause, but provided inflation falls back as we expect, the central bank is likely to start cutting rates early next year,” Capital Economics Senior Asia Economist Gareth Leather said in an emailed commentary.

“Thus, further local policy rate pause or cut could already be possible for the coming months, as fundamentally supported by the easing inflation trend as seen recently amid higher base/denominator effects; also as a function of future Fed rate pause or cut/s as well as the behavior of the peso exchange rate, going forward,” Rizal Commercial Banking Corp. Chief Economist Michael Ricafort said separately.

Reserve requirement ratio

Medalla also hinted at the possible reduction of the reserve requirement ratio (RRR) by June.  This refers to the the amount of cash a bank must hold in its reserve against deposits made by customers in the Philippines.

He previously said a single-digit RRR — a target which was previously set by his predecessor former Governor and now Finance Secretary Benjamin Diokno — could still be realized by the end of his term in July 2023.

Medalla said the reserve requirement of big banks, currently at 12%, should be cut before the expiration of the relief the central bank provided to micro, small, and medium enterprises (MSMEs).

“We don’t want the expiration of the reserve qualification of the MSMEs to expire without us offsetting it by cutting the reserve requirements, but from now on, I think the message is the changes in the reserve requirements are operational, not monetary policy,” he said.

Medalla is currently serving the unexpired term of his predecessor Diokno, who also took over the rest of the term of late former Governor Nestor Espenilla, Jr. who passed away in February 2019.

Espenilla in 2017 said he personally wanted to see that the reserve requirement be cut by half under his leadership

Moving forward, Medalla said any changes to the reserve requirements are best to be made by June 30.— RSJ, GMA Integrated News