BSP: Inflation breaks past 4% target in March

Key rate likely to hit 2.75% in 2023

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) sees inflation  breaching the upper end of its two to four percent target band in March that could result in an increase of 75 basis points in interest rates by next year.

BSP Governor Benjamin Diokno said inflation could range from 3.3 to 4.1 percent in March from three percent in February amid the continued oil price hikes along with higher electricity rates in areas serviced by Manila Electric Co. (Meralco), higher meat prices and the weak peso.

These, Diokno explained, could be offset in part by lower water rates in Maynilad and Manila Water-serviced areas and the observed decrease in prices of rice, fish and vegetables due to easing supply constraints.

“Looking ahead, the BSP will continue to monitor emerging price developments and possible second-round effects to help achieve its primary mandate of price stability that is conducive to balanced and sustainable growth of the economy,” Diokno said.

In its latest assessment, the central bank’s Monetary Board now expects inflation to average 4.3 instead of 3.7 percent for 2022 and 3.6 instead of 3.3 percent for 2023.

The BSP is confident inflation will fall within the target band if the price of Dubai crude oil averages at $95 per barrel.

It expects inflation to breach the target and average 4.4 percent if Dubai crude oil rises to $120 per barrel and 4.7 percent if it hits $140 per barrel.

The Monetary Board also raised its Dubai crude oil price assumptions to $102.23 instead of $83.33 per barrel for this year and to $88.21 instead of $75.69 per barrel for next year.

The BSP has kept interest rates at record lows for 11 straight rate-setting meetings or since November 2020 to help the economy recover quickly from the impact of the pandemic.

In 2020, the central bank slashed key policy rates by 200 basis points, bringing the benchmark rate to an all-time low of two percent as part of its pandemic response measures that unleashed P2.3 trillion into the financial system.

As a result of the heavy lifting, the country emerged from recession with a gross domestic product (GDP) growth of 5.6 percent last year, reversing the 9.6 percent contraction in 2020.

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

Diokno vowed to keep an accommodative monetary policy stance by keeping interest rates steady at record lows in the first half of the year before starting the normalization process in the second half.

The BSP chief said raising the benchmark rate to a range of 2.5 percent to 2.75 percent by 2023 is possible.

“But the level and speed of adjustment will depend on the best available information that is accessible to the Monetary Board when it makes the decision,” Diokno said in a Viber message.