BSP chief confirms: Rate cut off the table

BANGKO Sentral ng Pilipinas Governor Benjamin Diokno on Thursday said the country’s central monetary authority is “not inclined” to tighten monetary policy at this juncture, despite its forecast that inflation will likely continue to rise in the next few months.

In a press briefing, Diokno told reporters that their latest monitoring showed that inflation pressures continue to be “transitory” and “supply-side” in nature and, therefore, do not warrant any movements from the monetary policy side.

“The capacity of monetary policy to combat inflation is limited when price spikes are driven by cost-push forces. Following the standard approach among central banks in responding to supply-side shocks, the BSP typically accommodates initial effects of supply shocks as these tend to be short-lived in nature,” the BSP governor said.

“Notwithstanding the impact of supply-side factors on the inflation path, we are not inclined to tighten monetary policy at this juncture. The inflation uptrend is seen to be largely transitory, reflecting mainly the impact of base effects, weather-related disturbances and the ASF [Asian Swine Fever] outbreak on a narrow range of food items, as well as higher global oil prices,” he added.

The BSP also thinks there has been limited evidence of second-round effects so far.

“Inflation expectations have risen slightly but remain anchored within the inflation target band. Demand-based pressures on inflation also remain largely subdued,” Diokno said.

Diokno, however, confirmed that inflation will continue to remain elevated in the next few months, especially in the first half of the year.

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“Inflation is projected to rise above the high end of the target range in the first half of 2021, with the peak expected in the second quarter due to the transitory impact of supply-side price pressures, as well as positive base effects,” Diokno said.

ING Bank economist Nicholas Mapa viewed Diokno’s stance as appropriate.

“A full reversal in monetary stance would, however, result in the following: a scenario of still elevated cost-push inflation, compounded with rising borrowing costs, not exactly your prescription to cure a recession nor elevated unemployment,” Mapa said.

“Going forward, we believe BSP will continue to deliver its mandate with an eye on price stability while also remaining mindful of the need to support the fledgling recovery efforts.  Adjusting monetary policy for anything other than getting prices in line or supporting the stimulus efforts will likely need to take a backseat for now.  With the recession upon us, BSP clearly has its priorities ironed out,” Mapa added.

For now, the BSP said it is likely to retain its monetary policy but vowed to keep a close eye on developments on the price front.

“The BSP believes that monetary policy settings remain appropriate to support domestic activity,” Diokno said.

“Given that the recent uptrend in inflation continues to originate from supply-side factors, monetary authorities will remain vigilant against the emergence of second-round effects,” he added.

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