PRICE increases of major commodities are expected to slow down further this year as the ongoing health and quarantine measures to contain the coronavirus disease (COVID-19) are expected to dampen domestic demand.
During last week’s monetary policy stance meeting, the Monetary Board said inflation is projected to average at 2.2 percent for 2020 and 2.4 percent for 2021.
This is lower than the previous forecasts of 3.0 percent for 2020 and 2.9 percent for 2021.
The full-year inflation target range is set between 2 and 4 percent for this year and next.
Benjamin Diokno, Bangko Sentral ng Pilipinas (BSP) governor, said the downward adjustment in the inflation forecasts could be attributed to the “lower-than-projected inflation in February 2020, the sharp decline in global crude oil prices, and the impact of COVID-19 on global and domestic growth.”
“The COVID-19 outbreak is seen as having a negative impact on global manufacturing and trade, and the ongoing health and quarantine measures to contain it could likely dampen domestic demand, thus contributing to reduced inflation pressures in the coming months,” Diokno said.
He added that the sharp decline in global commodity prices, particularly crude oil, on market concerns over a potential slowdown in global economic activity can further temper inflationary pressures.
The national government has implemented a price freeze for basic commodities, several food items, and medicines, in line with the declaration of a state of calamity over the entire Philippines.
Recognizing the negative effects brought by COVID-19 to the Philippine economy, the Monetary Board on Thursday released a number of monetary tools starting with the reduction of the key rates of the BSP.
The Monetary Board decided to cut the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 50 basis points to 3.25 percent, effective March 20.
The interest rates on the overnight lending and deposit facilities were also reduced to 3.75 percent and 2.75 percent, respectively.
Central banks lower interest rates to encourage borrowing and investing, thereby possibly stimulating economic growth. But this may hasten inflation.
Rates are raised, meanwhile, when there is too much growth. Higher borrowing rates slow inflation and return growth to more sustainable levels.
In addition, the Monetary Board authorized the time-bound, temporary relaxation of BSP regulations on compliance reporting by banks, calculation of penalties on required reserves, and single borrower limits.
The Monetary Board also approved a temporary reduction in the term spread on rediscounting loans relative to the overnight lending rate to zero.
Diokno maintained that although inflation expectations remain firmly anchored within the full-year target range of between 2 and 4 percent, he said the decision was meant to combat the negative effects of COVID-19 to the general economy.
“The Monetary Board noted that while the enforcement of quarantine measures could help in slowing the spread of the virus, the resulting disruptions to industries and private spending are likely to reduce economic growth in the near term,” Diokno added.
Moreover, Diokno said COVID-19 has likewise dampened prospects for the global economy, “which could negatively impact tourism and trade, Overseas Filipino remittances, and foreign investments.”
“Given these considerations, the Monetary Board decided that there is a need for a follow-on monetary policy response to address the adverse spillovers associated with the ongoing pandemic. With a manageable inflation environment and stable inflation expectations, the Monetary Board sees enough policy space for an assertive reduction in the policy rate at this juncture to cushion the country’s growth momentum and uplift market confidence amid stronger headwinds,” Diokno said.
The monetary policy easing, according to the central bank chief, is also “aimed at mitigating the risk of financial sector volatility in light of unfolding global developments by ensuring adequate domestic liquidity and credit in the financial system as well as lowering borrowing costs for affected firms and households.”
