PAUSE. Bangko Sentral ng Pilipinas' (BSP) policy-making Monetary  Board (MB) maintained on Thursday (May 18, 2023) the central bank's key policy rates after hiking it by a total of 425 basis points since May 2022. This, after noting the slowdown of domestic inflation rate and the expectations that will return within the government's 2-4 percent target band as early as September this year. (Photo grabbed from BSP's Facebook page) 

MANILA – After hiking key rates for nine consecutive rate setting meetings since May 2022, Philippine monetary authorities on Thursday maintained the Bangko Sentral ng Pilpinas’ (BSP) policy rates due mainly to deceleration of inflation rate.

Thus, the overnight reverse repurchase (RRP) rate is still at 6.25 percent, the overnight repurchase (RP) rate is at 6.75 percent and the overnight deposit rate is at 5.75 percent.

“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,” BSP Governor Felipe Medalla said in a briefing on Thursday,

Thursday’s pause in the policy-making MB’s rate tightening moves is a change after the hikes in the key rates from its record-low 2 percent, with the upward adjustment aimed at helping address the jumps in inflation rate.

Relatively, the MB slashed the central bank’s average inflation forecast for this year from 6 percent to 5.5 percent and the 2024 projection from 3.1 percent to 2.8 percent.

Medalla said these changes “continue to reflect a gradual return of inflation to the target band of 2‑4 percent over the policy horizon.”

He said inflation expectations for 2024 to 2025 “are steady and within the target range.”

He, on the other hand, noted that while domestic expansion remains robust in the first three months of this year “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.”

He said the Board is also “encouraged by the recent mounting of whole-of-government actions to ease constraints on food supply.”

He, however, pointed out that “even as headline inflation has continued to decelerate with slower increases in the prices of food and energy-related items, core inflation has only eased marginally.”

Domestic inflation rate hit its 14-year high if 8.7 percent last January but has slowed since then, with the April figure already at 6.6 percent, from month-ago’s 7.6 percent.

Core inflation, which excludes volatile oil and food items, is almost flat at 7.9 percent last April from month-ago’s 8 percent.

Inflation rate is expected to slow to within-target levels as early as in September this year.

Medalla said balance of risks to inflation outlook “remains largely tilted towards the upside owing to persistent constraints in the supply of key food items, the potential impact of El Niño on food prices and utility rates, as well as the effects of possible additional adjustments in transportation fares and wages.”

These are, however, countered by the lower-than-expected global economic recovery, he said.

“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. 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 said.

Medalla said any changes in the BSP’s key rates will partly be affected by the developments on inflation, their inflation forecasts, and adjustments in the Federal Reserve’s key rates.

“So, in short, the more likely scenario is neither a cut nor an increase in the next two or three policy meetings,” he said.

Asked for any changes in bank’s reserve requirement ratio (RRR) as early as June this year, Medalla said this is always on the table because the country’s RRR remains high and because the regulatory relief extended to loans for small and medium enterprises (SMEs) will expire in end-June this year.

“Right now, loans to medium and small scale industries qualify as requires until they mature. So if we decide not to extend that policy then we must offset it by cutting reserve requirements,” he said.

RRR have been reduced by a total of 200 basis points in 2020 to 12 percent for universal and commercial banks (U/KBs) as part of the central bank’s move to encourage lending during the pandemic to shore up economic activities.

The central bank chief said changes in the RRR are related on operations and not monetary policy.

“We adjust the size of our facilities to make sure that such changes in the reserve requirement policy have no effect on money supply,” he added. (PNA)