BSP keeps rates unchanged despite higher inflation outlook

The Bangko Sentral ng Pilipinas’ (BSP) Monetary Board on Thursday decided to keep interest rates unchanged for the third straight meeting, despite expecting higher inflation for the year in a bid to support economic growth, which slowed down in the second quarter amid elevated inflation and interest rates.

Following its policy meeting, BSP Governor Eli Remolona said the Monetary Board “decided to keep the interest rate on the BSP’s overnight reverse repurchase facility at 6.25%.”

“The interest rates on the overnight deposit and lending facilities were thus retained at 5.75% and 6.75%, respectively,” Remolona said.

Monetary policy or interest rates are among the tools used by central banks to stabilize inflation through controlling money supply by raising borrowing costs.

For example, the BSP sets the overnight reverse repurchase rate or the key policy rate, in which the central bank borrows from banks to maintain price stability.

This, in turn, impacts the country’s money supply as it shifts money from banks into the central bank.

Since May last year, the Monetary Board has raised interest rates by a total of 425 basis points to temper rising inflation.

Keeping the rates untouched in its latest meeting is in line with the BSP’s “long pause” stance in adjusting monetary policy as inflation continued its downtrend for several consecutive months.

Inflation print declined for the sixth straight month in July, clocking in at 4.7% from 5.4% in June amid slower movements in utility, food, and transport prices. 

Despite keeping rates unchanged, the BSP is expecting inflation to average 5.6% this year, higher than the 5.4% projection in its June meeting.

Remolona said the “generally higher path for inflation relative to the previous forecast from the monetary policy meeting in June” reflected mainly the impact of higher international oil prices.

The BSP chief said potential price pressures are linked to the impact of possible higher transport charges, higher minimum wage adjustments, persistent supply constraints on key food items, and the effects of El Niño weather conditions on food prices and power rates.

“Meanwhile, a weaker-than-expected global economic recovery remains the primary downside risk to the inflation outlook,” he said.

Amid lingering risks to inflation, Remolona hinted that the BSP stands ready to resume monetary policy tightening.

“We’re ready to tighten if we need to tighten. We’re following the data,” he said.

The Monetary Board, the BSP chief said, also recognized the challenging outlook for economic growth amid the weaker gross domestic product (GDP) growth in the second quarter.

GDP growth

The economy, as measured by GDP or the total value of goods and services produced in a specific period, grew by 4.3% —its slowest pace in nine quarters since the country entered the positive territory in the middle of 2021. 

This is slower than the 6.4% GDP growth rate seen in the first quarter, blamed in high inflation, elevated interest rates which tempered domestic consumption as well as tepid government spending during the period.

“Household consumption slowed due to elevated commodity prices, while government spending contracted relative to the previous year,” Remolona said.

“Given these considerations, the Monetary Board deemed it appropriate to maintain monetary policy settings to allow a moderation of inflation even as authorities continue to assess the emerging risks to the inflation outlook,” the BSP chief said.

He added that the strength of economic activity is “likely to moderate as pent-up demand wanes and the full impact of prior monetary policy tightening continues to manifest.”

“At the same time, fiscal impulse through programmed spending could support the growth momentum,” the BSP chief said.

The government is implementing a catch-up spending plan to make up for the underspending seen in the first half of 2023.

“The fiscal authorities are now pushing agencies to ramp up spending to fulfill the 2023 public expenditure program,” Remolona said.

Nonetheless, the central bank governor said sustained non-monetary measures remain crucial in addressing lingering supply-side pressures on prices.

“The BSP remains prepared to respond as necessary to safeguard the inflation target, in keeping with its primary mandate to ensure price stability,” Remolona said. — RSJ, GMA Integrated News