As higher global oil prices and desperate supply chain crunch continue to hasten inflation worldwide, the Monetary Board yesterday decided to raise the interest rate on the key rates of the Bangko Sentral ng Pilipinas (BSP) by another 25 basis points.

BSP’s overnight reverse repurchase facility now stands at 2.5 percent. Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 2 percent and 3 percent, respectively.

Benjamin Diokno, BSP governor and Monetary Board chief, said the Board noted “upside risks continue to dominate the inflation outlook up to 2023.”

“Pressures are emanating from the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, as well as pending petitions for transport fare hikes due to elevated oil prices,” Diokno said.

He added the impact of a weaker-than-expected global recovery and the possible reimposition of local COVID-19 restrictions amid an uptick in infections continue to be the main downside risks to the outlook.

“Given these considerations, a follow-through increase in the policy rate enables the BSP to withdraw its stimulus measures (due to the pandemic) while safeguarding macroeconomic stability amid rising global commodity prices and strong external headwinds to domestic economic growth,” Diokno said.

BSP’s latest baseline forecasts, according to Diokno, have shifted higher with average inflation projected to breach the upper end of the 2 to 4 percent target range at 5.0 percent in 2022 and 4.2 percent in 2023.

Inflation expectations have continued to rise.

“While they remain within the target range for 2023-2024, elevated expectations highlight the risk of further second-round effects arising from sustained price pressures,” Diokno said.

Faster price increases in transportation, gas, alcoholic beverages and some food items pushed inflation to 5.4 percent in May, the fastest recorded output since December 2018’s 5.2 percent.

Francisco Dakila, BSP deputy governor, said they see inflation averaging 5.6 percent in the second half of this year.

“The path also suggests that inflation is likely to remain above the target range for the first half of 2023. Risks are tilted to the upside both for this year and next, due to higher global oil prices. (But) we expect inflation to balance out by 2024,” Dakila said.

Dakila added economic recovery is continuing to gain traction, helped by the loosening of restrictions on mobility and the essential reopening of the global economy and improving labor conditions.

“We continue to see uncertainties coming from the possible dampening of global growth as central banks normalize and risks coming from the pandemic lockdowns that could impact growth of our major trading partners like China,” Dakila also said.

Diokno said the Monetary Board reiterates its support for the “carefully coordinated efforts of other government agencies as part of a whole-of-government approach in implementing non-monetary interventions to mitigate the impact of persistent supply-side factors on inflation.”

“In line with the ongoing normalization of its monetary policy settings, the BSP is prepared to take all necessary policy action to bring inflation toward a target-consistent path over the medium term and deliver on its primary mandate of price stability,” he added.

Faster price increases in transportation, gas, alcoholic beverages and some food items pushed inflation to 5.4 percent in May, the fastest recorded output since December 2018’s 5.2 percent.

Last month, inflation was at 4.9 percent. In May of last year, when the country was still under the strictest quarantine level to fight off the COVID-19, inflation was at 4.1 percent.

The Philippine Statistics Authority said the acceleration last month was primarily due to the “higher annual growths in the food and non-alcoholic beverages index at 4.9 percent, and transport index at 14.6 percent.”

These commodity groups also contributed to the upward trend of the headline inflation in May: alcoholic beverages and tobacco, 6.8 percent; clothing and footwear, 2.1 percent; recreation, sport and culture, 1.7 percent; and personal care and miscellaneous goods and services, 2.5 percent.

Inflation rates went down for housing, water, electricity, gas and other fuels at 6.5 percent; and furnishing, household equipment and routine household maintenance at 2.5 percent.
Inflation for food at the national level increased further to 5.2 percent in May, from 4.0 percent last April.

“The uptick in the food inflation was primarily influenced by the double-digit annual growths in the vegetables, tubers, plantains, cooking bananas and pulses index at 15.2 percent, and oils and fats index at 13.6 percent,” said National Statistician Dennis Mapa.

Mapa added higher annual increments were recorded in flour, bread and other bakery products, pasta products and other cereals (4.8 percent); meat and other parts of slaughtered land animals (5.4 percent); fish and other seafood (6.2 percent); milk, other dairy products and eggs (1.5 percent); sugar, confectionery and desserts (8.7 percent); and ready-made food and other food products (3.5 percent).

Inflation in the National Capital Region (NCR) increased further to 4.7 percent from 4.4 percent the previous month, mainly due to the higher annual increase in the food and non-alcoholic beverages index.

Contributing largely to the uptrend of inflation in NCR was transport with an inflation rate of 13.8 percent in May, from 12.3 percent in April.

Inflation in areas outside NCR was higher at 5.5 percent from 5.1 percent last April, mainly due to the higher inflation for food and non-alcoholic beverages, followed by transport.

The highest inflation during the month remained in the Cordillera Administrative Region at 6.9 percent, while the lowest was still in Bangsamoro Autonomous Region in Muslim Mindanao at 2.4 percent.
Within forecast range

Benjamin Diokno, Bangko Sentral ng Pilipinas (BSP) governor, said the May figure is within the BSP’s forecast range of 5 to 5.8 percent and “consistent with the BSP’s assessment of continued uptick in inflation as supply-side pressures persist.”

“Inflation is projected to settle above the government’s target range of 2 and 4 percent for 2022 and average near the upper band of the target range for 2023,” Diokno said, noting that inflation is still “driven primarily by supply-side factors amid volatile global commodity prices.”

“Supply chain disruptions could also contribute to inflationary pressures, and thus warrant closer monitoring to enable timely intervention to arrest emergence of further second-round effects,” Diokno added.

“The latest assessment also indicates that domestic economic activity has gained stronger traction with the easing of mobility restrictions. However, heightened geopolitical tensions, a resurgence in COVID-19 infections in some countries along with faster-than-expected monetary policy normalization in advanced economies have clouded the outlook for global economic growth,” he also said.

He stressed that the balance of risks to the inflation outlook now “leans toward the upside for both 2022 and 2023. The upside pressures emanate from the potential impact of higher oil prices, including on transport fares, as well as the continued shortage in domestic pork and fish supply.”

The downside risks are linked mainly to the potential impact of a weaker-than-expected global economic recovery.

“The BSP will continue to review emerging price developments and the outlook for inflation and growth in the country ahead of the upcoming monetary policy meeting (on June 23).

The pace and timing of any further monetary policy actions by the BSP shall be guided by data outcomes, in keeping with the BSP’s price and financial stability objectives,” Diokno said.

Temporary measures

The National Economic and Development Authority, meanwhile, highlighted the issuance of Executive Order (EO) No. 171 and the government’s fuel subsidy program in helping ease the impact of global inflationary pressures.

“The Russia-Ukraine conflict has disrupted the global supply chain and elevated commodity prices, particularly for fuel. We have seen how a single crisis can set us back, so the Duterte administration has pursued both short- and long-term interventions to increase the resilience of our domestic economy against external shocks,” said Socioeconomic Planning Secretary Karl Kendrick Chua.

To help cushion the impact of higher fuel prices on the most vulnerable, Chua said the government has increased the total budget for targeted subsidies to P6.1 billion.

As of June 1, over 180,000 public utility vehicle drivers and operators have received their P6,500 fuel subsidy under the Pantawid Pasada program. Also, more than 158,000 farmers and fisherfolk are set to receive P3,000 as fuel discounts.

“To facilitate the entry of more goods at lower prices, President Duterte issued EO No. 171 to modify tariff rates for pork, corn, rice, and coal. This is among the key recommendations of the Economic Development Cluster in addressing the inflationary impact of the Russia-Ukraine conflict,” Chua said.

“These temporary measures are expected to increase our food supply and ease higher electricity costs in the short-term,” Chua said.
Dependent on oil

Analysts at the Bank of the Philippine Islands (BPI) said inflation may go up further in the coming months depending on the behavior of oil.

“Assuming the average price of oil will stay at $100 until the end of the year, there is a possibility that inflation will peak in early fourth quarter near 6 percent. However, there are still a lot of uncertainties surrounding the outlook for oil. The European Union is planning to impose an oil embargo against Russia as a response to its attack in Ukraine. Countries will be competing for other sources of oil in this scenario and prices will most likely soar,” BPI said in a statement.

BPI also said the peso is expected to weaken further in the coming months considering the surge in import demand, as energy companies will likely incorporate the depreciation of the peso into the retail cost of oil and electricity.

Analysts also see a spillover effect on food given the increasing reliance of the country on imported food products like meat and rice.

“Considering the risks, we expect a 100 basis points hike from the BSP from now until the end of the year, which will bring the policy rate to 3.25 percent. We believe the economy has enough cushion in case the BSP decides to hike its policy rate further. Historical experience has shown that the economy can grow by at least 6 percent in an environment where the policy rate is around 3 percent,” BPI said, adding that a more significant risk to growth is inflation and the depreciation of the peso.

“Hiking the policy rate (RRP) will serve as a stabilizing tool that could temper the depreciation of the Peso. Also, this will likely prevent a substantial decline in Dollar reserves that could lead to more volatility in the local markets,” BPI said.

Recovery to slow down

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said higher inflation would slow down the economic recovery, amid the reduction in the purchasing power or disposable income given more spending for oil, energy and other global commodities and to pay for higher prices of affected goods and services.

“Further reopening of the economy towards greater normalcy…could help economic recovery prospects and some pickup in demand and potentially in prices/inflation, going forward, though could be offset by the relatively slower pace of economic recovery,” Ricafort said.

Supply-side inflation factors, he said, would be better addressed by non-monetary measures to increase the supply and lower tariffs and prices of local food, pork, fish, rice and other agricultural products.

“As a result, risk of any second-round inflation effects, which could be triggered by higher wages and possible increase in transport fares, would still be monitored before any further hikes in local policy rates,” Ricafort said.

He added the latest inflation rate is still way higher than the key local policy rate at 2.25 percent “and this would still support any further potential hike in local policy rates amid negative net interest rates as partly sustained by excess liquidity in the financial system.”

“For the coming weeks, the continuation of relatively accommodative monetary policy, especially though relatively modest hikes in local policy rates remains possible; but any further cut in large banks’ RRR (from the current 12 percent) would likely be deferred until inflation stabilizes further; as the economy needs all the support measures that it could get at this time largely due to the adverse economic effects of the COVID-19 lockdowns 2020-2021, amid the lack of additional funding for more fiscal stimulus measures, thereby making continued relatively accommodative monetary policy measures possible to help improve prospects of economic recovery,” Ricafort said.

Rolling back its pandemic-induced interventions, the policymaking Monetary Board yesterday decided to raise the interest rate on the key rates of the Bangko Sentral ng Pilipinas (BSP) by 25 basis points (bps).

Effective today, BSP’s overnight reverse repurchase facility will be at 2.25 percent. The interest rates on the overnight deposit and lending facilities will be at 1.75 percent and 2.75 percent, respectively.

Benjamin Diokno, BSP governor and Monetary Board chief, noted the latest baseline forecasts have “further shifted higher since the previous monetary policy meeting in March.”

“(This indicates that) elevated inflation pressures could persist over the policy horizon,” Diokno said.

He stressed that average inflation is likely to breach the upper end of the 2 to 4 percent target range in 2022 at 4.6 percent, while the forecast for 2023 has edged closer to the upper end of the target band at 3.9 percent.

“The balance of risks to the inflation outlook now leans toward the upside for both 2022 and 2023, with upside pressures emanating from the potential impact of higher oil prices, including on transport fares, as well as the continued shortage in domestic pork and fish supply,” Diokno noted.

Downside risks, meanwhile, are linked mainly to the potential impact of a weaker-than-expected global economic recovery amid the lingering threat of COVID-19 infections, heightened geopolitical tensions, and a tightening of global financial conditions.

Diokno added they have observed the emergence of second-round effects, including the higher-than-expected adjustment in minimum wages in some regions.

“Inflation expectations have likewise risen, highlighting the risk posed by sustained pressures on future wage and price outcomes,” Diokno said.

The BSP chief added the strong rebound in domestic economic activity and labor market conditions during the first quarter of this year “provide scope for the BSP to begin its exit strategy from monetary accommodation.”

“With the provisional advances to the national government reduced from P540 billion in 2020 and 2021 to only P300 billion in January 2022, the national government will fully settle these loans today, ahead of the maturity schedule of 11 June 2022,” Diokno said.

Given ample liquidity, a gradual recovery in credit activity, and stable financial market conditions, Diokno said they have also decided to reconfigure the BSP’s government securities purchasing window “from a crisis intervention measure into a regular liquidity facility under our interest rate corridor framework.”

“As part of the BSP’s standard monetary operations toolkit for injecting liquidity into the financial market, the recalibrated GS purchasing window shall enhance the BSP’s ability to manage domestic liquidity conditions and ensure the sustainability of its balance sheet,” Diokno said.

“Given these considerations, the Monetary Board believes a timely increase in the BSP’s policy interest rate will help arrest further second-round effects and temper the buildup in inflation expectations. The Monetary Board likewise reiterates its support for the sustained implementation of non-monetary interventions to mitigate the impact of persistent supply-side factors on inflation, particularly food supply and prices,” Diokno said.

The continued volatility in global oil and non-oil prices due to the conflict in Ukraine pushed the country’s inflation to its fastest in three years, data from the Philippine Statistics Authority (PSA) showed.

Consumer prices rose by 4.9 percent in April from the previous month’s 4 percent. This is the highest inflation rate since 2019 after the consumer price index was rebased to 2018 from 2012.

Year-to-date inflation settled at 3.7 percent, within the 2-4 percent target for 2022.

“On balance, persistent inflationary pressures point to the need for prompt monetary action to anchor inflation expectations. As the economic recovery continues to gain traction, the BSP shall proceed with its plans for the continued gradual withdrawal of its extraordinary liquidity interventions and the start of the normalization of its monetary policy settings.

Looking ahead, the pace and timing of further monetary policy actions by the BSP shall be guided by data outcomes, in keeping with the BSP’s price and financial stability objectives,” Diokno said.

Economists at the Bank of the Philippine Islands (BPI) said despite yesterday’s hike, the real policy rate “remains negative despite the rate hike of the BSP and has been negative for 20 months.”

“Raising the policy rate in this meeting has mitigated the risks that might have worsened without any adjustments in monetary policy. The possibility of bigger rate hikes and intermeeting hikes would have increased if the BSP did not hike (on Thursday). With the Fed likely to hike by 100 basis points in the next two months, the differential of the Fed and BSP policy rates by end of July would be 50 basis points assuming the BSP will only start hiking in June. In this scenario, the peso is expected to weaken at a faster pace,” BPI said.

The bank stressed “inflation has probably not reached the peak yet despite the recent surge in consumer prices.”

“Considering these risks, we now expect at least 100 basis points hike from the BSP this year from 75 bps previously. Despite this, we believe the economy has enough cushion in case the BSP decides to hike its policy rate further. Even with a 100 bps rate hike this year, the policy rate will still be below historical and pre-pandemic levels. Furthermore, the impact of rate hikes is usually gradual and the economy has the capacity to absorb slightly higher interest rates especially now that demand is almost back to pre-pandemic level,” BPI said.

Nicholas Mapa, ING Bank Philippines senior economist, said “markets have priced in an adjustment from the central bank given recent developments.”

“Elevated energy and food prices are likely to keep headline inflation above target for time while a recent wage hike confirms that second round effects have finally sprouted up. We expect BSP to retain its hawkish stance with the central bank likely to offload up to 75 bps worth of rate hikes in 2022,” Mapa said.

Mapa added the bigger development, however, was the “quick walk back of pandemic support with BSP ending the P320 billion provisional advance on top of recalibrating the bond purchase window.”

“With the economic recovery gaining traction, BSP decided to implement its exit strategy quickly and we expect further normalization throughout the year,” Mapa said.

The continued volatility in global oil and non-oil prices due to the conflict in Ukraine pushed the country’s inflation to its fastest in three years, data from the Philippine Statistics Authority (PSA) showed.

Consumer prices rose by 4.9 percent in April from the previous month’s 4 percent, the highest since 2019 after the consumer price index was rebased to 2018 from 2012.

Year-to-date inflation settled at 3.7 percent, within the 2 to 4 percent target for 2022.

PSA said the increase in the country’s inflation was mainly brought about by the higher annual increase in the index for food and non-alcoholic beverages at 3.8 percent; transport, 13 percent; and housing, water, electricity, gas and other fuels, 6.9 percent.

Also contributing to the uptrend were the higher annual increments in the indices of alcoholic beverages and tobacco; clothing and footwear; recreation, sport and culture; and personal care, and miscellaneous goods and services.

PSA said annual upticks slowed down in the indices of health at 2.4 percent; and restaurants and accommodation services at 2.8 percent.

Benjamin Diokno, Bangko Sentral ng Pilipinas (BSP) governor, said inflation could “settle above the government’s target range in 2022, before decelerating back to target in 2023 as supply-side pressures ease.”

“While there are signs that inflation expectation is higher for 2022, it remains broadly anchored to the target in 2023,” Diokno, in a statement, said.

Diokno said upside risks over the near -term continue to emanate from the shortage in domestic food supply as well as from the potential impact of higher oil prices on transport fares.

Downside risks are linked mainly to the lingering threat of coronavirus disease 2019 (COVID-19) infections, “as the emergence of new variants could temper the global economic recovery and prompt the reimposition of containment measures.”

“Latest assessment also indicates that domestic economic activity has gained stronger traction with the easing of remaining mobility restrictions. However, heightened geopolitical tensions and a resurgence in COVID-19 infections in some countries have also clouded the outlook for global economic growth. Supply-chain disruptions could also contribute to inflationary pressures, and thus warrant closer monitoring to enable timely intervention in order to arrest potential second-round effects,” Diokno said.

Karl Kendrick Chua, socioeconomic planning secretary, said the government is “accelerating a comprehensive set of interventions to mitigate the impact of rising commodity prices.”

“World commodity prices remain high as a consequence of the ongoing Russia-Ukraine war.

The impact is felt domestically not just on food and basic goods but also on transport and utilities,” Chua said.

Chua said the Economic Development Cluster (EDC) recommended the extension of Executive Order (EO) Nos. 134 and 135 and a temporary reduction of the most favored nation (MFN) tariff rate for corn to 5 percent in-quota and 15 percent out-quota with a minimum access volume of 4 million metric tons until December.

EO 134 aims to expand supply and further reduce prices of pork by extending the lower tariff of 15 percent in-quota and 25 percent out quota. EO 135 seeks to diversify rice sources by temporarily reducing MFN tariff rates on imported rice to 35 percent from 40 to 50 percent.

The EDC also recommended importing more wheat and producing more cassava as feeds substitute to augment the alternatives for corn.

Also, the government is providing fuel subsidies for public utility vehicle (PUV) drivers and farmers to address rising fuel prices.

As of April 30, around 180,000 PUV drivers and operators have received their P6,500 fuel subsidy from the Pantawid Pasada program.

The Department of Energy also continues its efforts to secure P1 to P4 per liter discounts from private oil companies for the public transport sector. The Department of Agriculture is implementing a fuel subsidy program for 158,730 corn farmers and fisherfolk.

The EDC also recommended temporarily reducing the MFN tariff rate for coal to zero until December and maintaining its buffer stock at the current 30 days minimum inventory.

“The government is accelerating the implementation of these interventions to temper the impact of inflation and rising prices. In the meantime, as we shift more areas in the country to Alert Level 1, we expect to accelerate our recovery and increase our economy’s resilience from external shocks,” Chua said.

Diokno said the Monetary Board will review its assessment of the inflation outlook and macroeconomic prospects with the release of the first quarter gross domestic product growth outturn, along with evidence of possible second round effects and developments in inflation expectations during the monetary policy meeting on May 19.

Even while upside risks to inflation have increased as higher oil prices due to geopolitical tensions start to impact local commodity costs, the policymaking Monetary Board last March maintained for the 11th consecutive session the key rates of the BSP.

BSP’s overnight reverse repurchase facility remains at 2.0 percent. The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.

Bank of the Philippines Islands (BPI) said inflationary pressures will likely worsen “if the BSP doesn’t hike its policy rate soon.”

In a statement, BPI economists said without any rate hikes from the BSP, “the interest rate differential between the Philippines and the US will be close to zero and will turn negative in 2023.”

“A situation like this will likely result to a substantial depreciation of the Peso and may de-anchor inflation expectations further,” BPI said.

“We continue to expect a 75 basis points adjustment in the policy rate this year from 2 percent to 2.75 percent. Even with this magnitude of increase, the policy rate will still be below historical levels and it may not have a substantial impact on growth and employment,” BPI added.

BPI also pointed out the impact of rate hikes is usually gradual and the economy has the capacity to absorb slightly higher interest rates, especially now that demand is almost back to pre-pandemic level.

“A surge in consumer prices due to oil might eventually hurt consumer spending and lead to slower growth. Hiking the policy rate will serve as a stabilizing tool that could temper the depreciation of the peso. Also, this will likely prevent a substantial decline in dollar reserves that could lead to more volatility in the local markets,” the economists from the bank added.

After declining continuously the past five months, the government yesterday reported that the country’s inflation accelerated to 4.0 percent in March 2022 from 3.0 percent the previous month as global oil prices continue to surge.

This brings the national average inflation from January to March 2022 at 3.4 percent. In March 2021, inflation was higher at 4.1 percent.

The Philippine Statistics Authority said increases in the indices of food and non-alcoholic beverages; housing, water, electricity, gas and other fuels; and transport “contributed largely to the upward trend of the overall inflation during the month.”

Higher annual increments were also observed in the following commodity groups: alcoholic beverages and tobacco; furnishings, household equipment and routine household maintenance; information and communication; and restaurants and accommodation services.

Benjamin Diokno, Bangko Sentral ng Pilipinas (BSP) governor, said average inflation could breach the upper end of the 2 to 4 percent target range this year.

“Nevertheless, (it) is projected to decline and settle within the target band at 3.6 percent in 2023. Inflation expectations have likewise risen, but continue to be anchored to the 2-4 percent target band,” Diokno said.

He stressed that the economic consequences of Russia’s invasion of Ukraine “have become a significant headwind in global economic recovery.”

“In particular, the Russia-Ukraine conflict could affect the Philippines through slower world GDP (gross domestic product) growth, higher crude oil prices, higher world non-oil prices, and potential second-round effects on inflation through transport fares, wages, and food prices. Among all these, the main channel through which the Russia-Ukraine war could affect the Philippines is through higher oil prices,” Diokno said.

“Under these circumstances, the BSP will closely monitor the emerging risks to the outlook for inflation and growth, and remain vigilant against possible second-round effects from supply-side pressures or any shifts in the public’s inflation expectations,” he added.
Diokno said the BSP “continues to have a wide arsenal of policy instruments to respond to possible adverse impact of external shocks.”

Even while upside risks to inflation have increased as higher oil prices due to geopolitical tensions start to impact local commodity costs, the policymaking Monetary Board last month decided to maintain for the 11th consecutive session the key rates of the BSP.

The overnight reverse repurchase facility remains at 2.0 percent. The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.

Diokno said the Monetary Board sees scope to maintain the BSP’s policy settings “in order to safeguard the momentum of economic recovery amid increased uncertainty, even as it continues to develop its plans for the gradual normalization of its extraordinary liquidity measures.”

“The BSP likewise supports the timely implementation of direct non-monetary measures by the government to mitigate the impact of the Russia-Ukraine conflict on global oil and non-oil commodity prices. Previous episodes of supply-side shocks in the country have shown that these are best addressed through timely non-monetary policy interventions that could ease directly domestic supply constraints and prevent second-round effects on prices,” Diokno said.

Karl Kendrick Chua, socioeconomic planning secretary, said the government has taken steps to address the inflationary pressures brought about by the Russia-Ukraine conflict.

“We have been proactively monitoring the impact of the Russia-Ukraine conflict. As early as March 7, the Economic Development Cluster (EDC) has already proposed interventions to manage the impact on the economy and the people,” Chua said.

The EDC’s policy interventions to manage supply and prices of key commodities include the following: expanding supply and reducing prices of pork by extending the lower tariff of 15 percent in quota and 25 percent out quota; accelerating the release of imported pork from cold storages; passing the proposed Livestock Development and Competitiveness Law; accelerating the release of Sanitary and Phytosanitary Import Clearance; and removing all non-tariff barriers.

Chua also said to cushion the impact of rising prices, the government will distribute unconditional cash transfers worth P500 per month to the poorest 50 percent of households.

Around 115,000 public utility vehicle drivers and operators have received P6,500 each under the Pantawid Pasada program.

“The government stands ready to support consumers, commuters, public transport drivers and operators, and agricultural producers to ease the impact of high oil and commodity prices. As COVID-19 cases subside, we also aim to move the entire country to alert level 1 to provide more opportunities for Filipinos to earn and provide for their families amid inflationary pressures,” said Chua.

Even while upside risks to inflation have increased as higher oil prices due to geopolitical tensions start to impact local commodity costs, the policymaking Monetary Board decided yesterday to maintain for the 11th consecutive session the key rates of the Bangko Sentral ng Pilipinas (BSP).

BSP’s overnight reverse repurchase facility remains at 2.0 percent. The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.

“On balance, the Monetary Board sees scope to maintain the BSP’s policy settings in order to safeguard the momentum of economic recovery amid increased uncertainty, even as it continues to develop its plans for the gradual normalization of its extraordinary liquidity measures,” Benjamin Diokno, BSP governor, said.

But Diokno stressed that latest baseline forecasts “have increased from the previous monetary policy meeting, reflecting the impact of higher global commodity prices.”

The Monetary Board sees average inflation could breach the upper end of the full-year target range of between 2 and 4 percent in 2022 at 4.3 percent, higher than the February forecast of 3.7 percent.

“Nevertheless, average inflation is projected to decline and settle within the target band at 3.6 percent in 2023. Inflation expectations have likewise risen but continue to be anchored to the 2-4 percent target band,” Diokno said.

He added that the BSP estimates continue to indicate a potential target breach if crude oil prices are higher than the $95 estimates.

From the previous estimates of $83.23 per barrel, the BSP now sees Dubai crude prices to reach $102.23 per barrel “due to geopolitical tensions and the conflict between Ukraine and Russia.”

“In addition, we have included a higher non-oil price inflation, with current elevated price levels continuing for the first half of this year. Higher domestic oil prices are also expected to dampen domestic growth prices which could lead to second-round effects,” Diokno said.

While upside risks to inflation have increased for 2022, Diokno however said the balance of risks to the outlook remain broadly balanced for 2023.

“Upside risks over the near term continue to emanate from the shortage in domestic pork and fish supply as well as from the potential impact of higher oil prices on transport fares,” Diokno said.

In this regard, he said the BSP “supports the implementation of social protection measures to alleviate the impact of rising crude oil prices on vulnerable sectors.”

“Sustained initiatives to ensure adequate domestic food supply could also mitigate further supply-side pressures on inflation,” Diokno said.

He said downside risks are linked mainly to the lingering threat of coronavirus disease 2019 (COVID-19) infections, as the emergence of new variants could temper the global economic recovery and prompt the reimposition of domestic containment measures.

“Domestic economic activity has gained stronger traction with the easing of remaining mobility restrictions. However, heightened geopolitical tensions and a resurgence in COVID-19 infections in some countries have also clouded the outlook for global economic growth.

Supply-chain disruptions could also contribute to inflationary pressures, and thus warrant closer monitoring to enable timely intervention in order to arrest potential second-round effects,” Diokno said.

“Given the potential broadening of price pressures over the near term, the BSP stands ready to respond to the buildup in inflation pressures that can disanchor inflation expectations, in keeping with its price and financial stability objectives,” he added.

Economists at the Bank of the Philippine Islands (BPI), however, see the Monetary Board to hike the key rates by 75 basis points (bps) this year to 2.75 percent.

“Even with this magnitude of increase, the policy rate will still be below historical levels and it may not have a substantial impact on growth and employment. Furthermore, the impact of rate hikes is usually gradual and the economy has the capacity to absorb slightly higher interest rates especially now that demand is almost back to pre-pandemic level,” BPI said.

BPI added that a more significant risk to the country’s economic prospects is the depreciation of the peso, “which will increase the cost of oil that the country imports from abroad on top of the increase brought by the conflict in Ukraine.”

“A surge in consumer prices due to oil might eventually hurt consumer spending and lead to slower growth. Hiking the policy rate will serve as a stabilizing tool that could temper the depreciation of the peso. Also, this will likely prevent a substantial decline in Dollar reserves that could lead to more volatility in the local markets,” BPI said.

The bank also said the chances of an intermeeting/unscheduled BSP rate hike “are increasing because of oil and currency volatility.”

“Kicking the can further may eventually lead to a situation that could force the BSP to hike by more than 25 bps in one meeting, similar to what happened in 2018,” it added.

Inflation was steady at 3.0 percent in February 2022 from the previous month’s rate as the slowdown in inflation of heavily-weighted food items offset the increase in non-food inflation.

Benjamin Diokno, Bangko Sentral ng Pilipinas (BSP) governor, said with a sustainable level of public debt, low debt-to-GDP ratio and steady sources of foreign exchange inflows, the country’s credit ratings are unlikely to be downgraded anytime soon.

“The above facts are strong arguments why the likelihood that the Philippines’ ratings will be downgraded by rating agencies are nil,” Diokno said yesterday.

Last month, Fitch affirmed the country’s investment grade BBB rating, amid a wave of downgrades of many emerging economies. The other major ratings agencies – S&P and Moody’s — also shared the same action.

Fitch cited “economic gains that demonstrate sustained recovery from the COVID-19 crisis” as the basis of its action.

Fitch’s rating affirmation followed the Philippine government’s announcement in January 2022 that the economy expanded by 7.7 percent in the fourth quarter on the back of renewed growth in consumption and investments.

The strong growth in the last quarter of 2021 brought full-year gross domestic product (GDP) growth to 5.6 percent, exceeding the target range of 5 to 5.5 percent and reversing the recession in 2020.

The Philippines has maintained the same rating from Fitch and other credit rating agencies throughout the pandemic, despite a wave of rating downgrades for many other countries during the same period.

Diokno said the gross international reserves “are ample, equivalent to more than 10 months-worth of imports of goods and services.”

“The received doctrine is that 3 months-worth of imports and services are sufficient,” Diokno said.

The central bank chief also stressed that the Philippines has “steady sources of foreign exchange inflows from overseas Filipino remittances, BPO receipts, exports earnings and surging foreign direct investments.”

Diokno also stressed that the perceived action of the US Federal Reserve could affect the currencies of both developed, emerging and developing economies, depending on the level of foreign indebtedness, on the foreign exchange buffers, and prospects for growth and inflation.

“The Philippines is not the typical emerging economy. Our first line of defense is our market determined foreign exchange system where we let the supply-demand dynamics determine the exchange rate, subject to BSP’s participation only to smoothen the fluctuations,” Diokno said.

He said the P12.03 trillion government debt shouldn’t be a cause for concern.

“The common misconception is that the absolute level of the public debt matters. It shouldn’t be. What matters is the level of public debt as percent of the size of the economy (or GDP), whether public debt is sustainable, and whether public borrowings were justified,” Diokno said.

He explained that the public debt-to-GDP ratio prior to the pandemic was 39.6. It rose to roughly 61 percent as a result of the pandemic. It is 70 percent local and 30 percent foreign.

The domestic debt includes the zero interest P300 billion in provisional advances by the BSP to the national government (NG); this is lower than the similar loan the NG received from the BSP worth P540 billion. BSP expects that the provisional advances will be fully settled by endJune 2022.

By international comparison, a debt-to-GDP of 61 percent is manageable, Diokno said.

“At its current ratio, the public debt is quite manageable. The country can easily outgrow its debt since we expect the Philippine economy to grow much faster than its debt. Put differently, the denominator (nominal GDP) is going to grow much faster than the numerator (nominal level of debt),” he added, stressing that the Philippines’ debt-to-GDP ratio at 61 percent “is much lower than that of other countries.”

According to Diokno, the increase in public debt was due largely to the pandemic and the higher spending for the Build, Build, Build program.

“As a result of the pandemic, the economy contracted. As a result, government revenues plummeted. At the same time, the government has to increase spending to finance new programs, such as, the hiring of more medical personnel, purchase of drugs and medicine, building of additional health facilities, purchases of vaccines, distributing cash and non-cash grants, and others. As a result, budget deficits climb from 3 percent of GDP before the pandemic to about 8.2 percent in 2021. In brief, the government has to borrow money to finance the ballooning budget gap,” he said.

“Think of the counterfactual: had we not done what we did as a nation and invested in the vaccine, we would still be languishing from COVID-19 and the economy would still be in deep slump,” Diokno added.

Risk factors cited by Fitch included the fiscal cost of the government’s COVID-19 response, the challenges arising from the unwinding of stimulus measures, and post-election uncertainty, particularly on the continuity of fiscal and economic policies.

However, the debt watcher was also of the view that the country’s fundamental policy strategies will continue, given the decades-long track record of sound economic performance.

Preferring to give support to the country’s fledgling economy given manageable inflation, the Monetary Board yesterday decided to maintain the key rates of the Bangko Sentral ng Pilipinas for the 10th consecutive session.

BSP’s overnight reverse repurchase facility at 2.0 percent. The interest rates on the overnight deposit and lending facilities were likewise kept at 1.5 percent and 2.5 percent, respectively.

Benjamin Diokno, BSP governor and Monetary Board chief, said the Board “deems it prudent to maintain the BSP’s accommodative policy stance given a manageable inflation environment and emerging uncertainty surrounding domestic and global growth prospects.”

“Given the stronger signs of recovery in output growth and labor market conditions and improvements in domestic financial markets, the BSP will continue to carefully develop its plans for the eventual normalization of its extraordinary liquidity measures when conditions warrant, in keeping with our price and financial stability mandates,” Diokno said.

The Board said latest baseline forecasts for 2022 and 2023 show inflation could average within the 2 to 4 percent target range.

“However, the inflation projections have slightly increased from the previous monetary policy meeting, reflecting the impact of higher domestic food inflation and global oil prices.

Inflation expectations have likewise risen marginally but continue to be anchored within the target band,” Diokno said.

He added the risks to the inflation outlook continue to lean slightly towards the upside for 2022 but remain broadly balanced for 2023.

“Upside risks are linked mainly to the continued shortage in domestic pork and fish supply and the possible impact of higher oil prices on transport fares. The implementation of non-monetary measures to ensure adequate supply of key food commodities must be sustained in order to mitigate supply-side pressures on inflation,” Diokno said.

“Increased volatility in international oil prices warrants close monitoring and appropriate interventions when necessary in order to arrest potential second-round effects,” Diokno added.

Diokno said they also observed that the domestic economic recovery has continued to gain traction on the back of the government’s ongoing vaccination program and the easing of mobility restrictions.

“However, elevated global commodity prices, heightened geopolitical tensions, and the uneven pace of vaccinations across countries could dampen the outlook for global economic recovery,” Diokno said.

Nicholas Mapa, ING Bank Philippines senior economist, said the “trigger point for a potential rate reversal would have to be linked to a solid economic recovery coupled with depreciation pressure on the peso.”

“BSP Governor Diokno retained his dovish stance in 2022, signaling he would prefer to extend support to the fledgling economic recovery. With inflation expected to stay within target in the near term, BSP has room to keep policy rates untouched at this meeting,” Mapa said.