Easing inflation gives BSP more room to retain rates

MANILA, Philippines — Monetary authorities see ample scope to keep a patient hand on their various policy levers as inflation eased further, supporting the narrative that the rise in consumer prices is on a downward trajectory.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the rebasing of the consumer price index to 2018 from 2012 resulted in the significant easing of the full year 2021 inflation to within the government’s target at 3.9 percent

Diokno said the January inflation of three percent from 3.2 percent in December is positive news.

“It supports the narrative that inflation is on its downward trajectory,” he said.

In a separate statement, the BSP said the inflation figure last month is consistent with the expectations of the central bank that inflation would decelerate further in the coming months, reverting back to the target range over the policy horizon.

“Given a manageable inflation outlook, the BSP sees ample scope to keep a patient hand on its various policy levers, while keeping an eye on potential risks to inflation and the financial system. The BSP stands ready to respond to emerging developments in keeping with its primary mandate to promote price and financial stability conducive to sustainable economic growth,” it said.

The BSP’s COVID response measures infused P2.3 trillion into the financial system to boost economic activity.

This helped the country bounce back from the pandemic-induced recession with a gross domestic product (GDP) growth of 5.6 percent last year, exceeding the government’s five to 5.5 percent target.

“The sustained economic growth in the fourth quarter of 2021 reflects easing community restrictions and the resulting improvement in mobility and market sentiment,” the BSP said.

However, the central bank warned that the lingering threat of COVID infections due to more virulent variants and its potential impact on broader global economic activity continue to cast significant uncertainty on the near-term outlook for growth.

Economic managers see a faster GDP growth of seven to nine percent this year.

The central bank said the Monetary Board would review its assessment of the inflation outlook along with the latest GDP outturn in its monetary policy meeting on Feb. 17.

ING Bank senior economist Nicholas Mapa said the January inflation reading and more importantly the revision to 2021 inflation appears to have given the BSP a little more space to retain its accommodative stance.

Mapa cited the pronouncement made by the BSP governor that the central bank need not move in lockstep with the US Federal Reserve, suggesting that Diokno prefers to maintain his stance despite impending rate hikes by the Fed.

Mapa said price pressures could intensify in the coming months as supply side bottlenecks remain unresolved as domestic hog production continues to be hampered by the spread of African swine fever while crude oil prices edge higher.

He said improving economic conditions have fueled the modest rebound of demand-side pressures that could nudge inflation higher as well.

“Persistent inflation pressure coupled with the likely reversal in financial flows linked to Fed hikes could eventually convince a rather dovish Diokno to finally consider a policy adjustment by the end of the second quarter,” Mapa said.