BSP maintains policy rate at 6.25%

The Bangko Sentral ng Pilipinas maintained its policy rate at 6.25 percent on Thursday to control the rise in inflation due to the looming higher food and transportation costs.

Consequently, BSP retained interest rates on the overnight deposit and lending facilities at 5.75 percent and 6.75 percent, respectively.

BSP said overall inflation might accelerate to 5.8 percent this year, up from its previous estimate of 5.6 percent and official level of 5.3 percent in August.

The central bank also adjusted its inflation forecast upward to 3.5 percent from 3.3 percent for next year, while it kept initial projection of 3.4 percent for 2025.

"The upward adjustments in the 2023 and 2024 projections reflect the spillovers from weather disturbances, rising global crude oil prices, and the recent depreciation of the peso" BSP Governor Eli Remolona Jr. said.

He said drought from El Niño might reduce agricultural supply which would force businesses to increase food prices to sustain their operations and fulfill customer orders.

The weather bureau said El Niño might persist until the first quarter next year.

Food as a major inflation growth driver comprises over 30 percent of all the items in the consumer price index.

Rice prices recently rose to P60 per kilo, forcing the government to impose price caps for regular and well-milled rice.

"No fireworks were seen from the BSP with the central bank simply maintaining its current policy stance. The BSP opted for another "hawkish hold" by keeping policy rates at 6.25 percent while maintaining readiness to hike should data conditions warrant further tightening," according to Nicholas Mapa, ING senior economist for the Philippines.

High global oil prices

Remolona added transportation fares and electricity charges will also likely increase as the commodities' providers aim to recoup losses from higher global oil prices.

These have increased by 15 percent over 11 weeks and amid the persisting war between oil exporting countries Russia and Ukraine.

With its previous rate hikes of up to 425 basis points post-pandemic, BSP said consumption of certain goods and services has tempered, resulting in lower inflation rates in recent months from a peak of 8.7 percent in January.

"At the same time, the BSP Monetary Board noted that recent indicators of domestic economic activity pointed to waning pent-up demand, even as the impact of prior monetary policy tightening continues to weigh on credit," Remolona said.

BSP said inflation would decelerate to government target of 2 percent to 4 percent in the last quarter of this year as long as supply issues do not surface.

However, Remolona said the central bank's Monetary Board is ready to increase its policy rate when supply shocks occur, especially of rice.

To prevent rice supply issues, Remolona said the board supports the reduction of 35 percent tariff on rice imported from the members of the Association of Southeast Asian Nations. The Department of Finance suggests lowering the tariff to 0 percent to 10 percent depending on local rice production data.

"The Monetary Board also reiterated the need for non-monetary interventions, including the temporary reduction of import tariffs with calibrated volumes and timely arrival of import commodities," he said.