The Philippine central bank kept its benchmark interest rate unchanged at 6.50% on Thursday, citing easing inflation pressures and downside risks to the outlook following recent policy measures to lower rice prices.
The Bangko Sentral ng Pilipinas (BSP) maintained the overnight deposit facility rate at 6.00% and the overnight lending rate at 7.00%, as widely expected by economists.
“The Monetary Board decided to maintain the BSP’s Target Reverse Repurchase (RRP) Rate at 6.50 percent,” the central bank said in a statement. “The balance of risks to the inflation outlook has shifted toward the downside due to the impact of the tariff adjustment on rice prices under Executive Order No. 62 (EO 62).”
The decision comes as inflation in the Southeast Asian nation eased to 3.9% in May, within the government’s 2-4% target range. The BSP noted that inflation expectations remain well-anchored for 2024 to 2026, based on its latest survey of private sector forecasters.
BSP Governor Eli Remolona told reporters after the meeting that while price pressures are expected to dissipate in the near term, lingering pressures on food items other than rice, transport charges, and electricity rates continue to pose upside risks to inflation.
“If sustained, an improvement in inflation outlook would allow the Monetary Board to consider a less restrictive monetary policy stance,” Remolona said. “However, uncertainty in the external environment requires continued caution against potential spillovers, including those in the financial markets.”
The central bank’s latest baseline inflation forecasts for 2024 and 2025 have been revised lower compared to previous projections in May. The risk-adjusted inflation forecast is now estimated at 3.1% for both years, significantly lower than in the previous forecast round.
The BSP attributed the downward revision primarily to the implementation of reduced tariffs on rice imports under Executive Order 62, signed by President Ferdinand Marcos Jr. on June 20. The order is expected to lower domestic retail prices of imported rice by 14.8% or about 6.67 pesos per kilogram.
“The lower tariff on rice is one of the primary contributors to the downward revision in the inflation forecasts for 2024-2025 and the shift to the balance of risks towards the downside,” the central bank said.
Despite holding rates steady, the BSP warned that GDP growth is expected to decelerate in the second half of 2024, partly due to the impact of positive real interest rates following its tightening cycle. The central bank has raised rates by a cumulative 425 basis points since May 2022 to tame inflation.
“Prospects for domestic output growth are largely intact over the medium term, supported by improved labor market conditions and robust export growth,” the BSP statement said.
The peso has weakened by 1.49% against the U.S. dollar since the previous policy meeting, trading at an average of 58.19 to the greenback between May 16 and June 5. The central bank cited expectations that the U.S. Federal Reserve will keep interest rates higher for longer amid slow disinflation progress as a factor weighing on the local currency.
On the fiscal front, the national government’s spending rose by 16.2% year-on-year in the January-April period, while revenues increased by 16.8%. The fiscal deficit widened to 229.9 billion pesos from 204.1 billion pesos in the same period last year.
The BSP noted that bank lending activity has shown signs of increasing momentum in the first half of 2024. Outstanding loans of universal and commercial banks expanded by 9.6% year-on-year in April, up from 9.4% in March.
Globally, the central bank observed improved prospects for economic activity, citing the JP Morgan All-Industry Output Index increase in May as new business activity and new orders strengthened.
“While many central banks continue to assess inflation dynamics and the impact of previous monetary policy tightening, several major central banks have begun reducing their respective key interest rates as inflationary pressures eased further in their respective economies,” the BSP said.
The next monetary policy meeting is scheduled for August 15, where the BSP will continue to assess domestic and global economic developments to ensure price and financial stability.
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