THE Philippine central bank kept its key interest rate steady for an 11th straight meeting on Thursday, even as it warned that its inflation target might be breached this year amid surging global oil prices due to Russia’s continued invasion of Ukraine.
The Bangko Sentral ng Pilipinas (BSP) left the benchmark rate at a record low of 2%, as predicted by 15 of 17 economists in a BusinessWorld poll last week. Deposit and lending rates were also kept at 1.5% and 2.5%. Its last rate move was a 25-basis-point (bp) cut in November 2020.
“The Monetary Board sees scope to maintain the BSP’s policy settings in order to safeguard the momentum of economic recovery amid increased uncertainty,” central bank Governor Benjamin E. Diokno told an online news briefing, even as it plans to normalize extraordinary liquidity measures started during a coronavirus pandemic.
“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 dis-anchor inflation expectations,” he added.
The Philippines and other Asian economies including Indonesia and Japan have abstained from the global rate hike cycle led by the Federal Reserve as it awaits signs of significant price increases.
Mr. Diokno said domestic economic activity has gained stronger traction with easing coronavirus lockdowns. But heightened geopolitical tensions and a resurgence in COVID-19 infections in some countries have 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,” he said.
Manila, the capital and nearby cities and provinces have been placed under the most relaxed lockdown since March 1, allowing businesses to boost their operations.
Global oil prices have been spiraling in the past weeks amid Russia’s continued invasion of Ukraine. Russia, the world’s second-biggest crude exporter, and Ukraine are major exporters of wheat.
Back home, the steep increase in oil prices has fueled calls for higher minimum fares and wages. The government has given out P2.5 billion in fuel subsidies to the transport and agriculture sectors, and was preparing another P2.5 billion in dole-outs.
The World Health Organization this month warned about the Deltacron coronavirus variant that had started to spread in Europe. China, Hong Kong and Korea are still experiencing an Omicron wave that peaked in the Philippines earlier this year.
Mr. Diokno earlier said they were keen to remain patient and would assess a rate increase in the second half, when recovery will have become sustainable.
BSP Deputy Governor Francisco G. Dakila, Jr. said they expect inflation to average 4.3% this year, above the 2-4% target and faster than the previous 3.7% estimate. Inflation in February was 3%. The central bank also raised its inflation forecast for next year to 3.6% from 3.3%.
He said their Dubai crude price projection was $102.23 per barrel, higher than $83.33 at the previous meeting after factoring the worsening war. The price is expected at $88.21 per barrel next year from $75.69.
The Philippines has limited trade with Russia and Ukraine but is a net oil importer. Prices of gasoline, diesel and kerosene have increased by P14.90, P19.20 and P16.35 a liter this year.
“Higher domestic oil prices are expected to dampen domestic growth prospects,” Mr. Diokno said. “A sustained increase in domestic oil prices may result in the dis-anchoring of inflation expectations, which could lead to second-round effects and further dampen domestic demand.”
Meanwhile, the governor said the central bank was considering a cut in the reserve requirement ratio for banks. “We might do so in the second half of the year.”
The BSP might raise the key rate by 75 bps by the end of the year, said Emilio S. Neri, Jr., lead economist at Bank of the Philippine Islands. The possibility of an unscheduled BSP rate hike had also increased amid the weaker peso and volatile oil prices, he added.
“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,” he said in a note.
The Fed’s upcoming rate increases would be crucial in managing local inflation expectations and interest rate differentials, Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said in a separate note.
The Monetary Board will hold its next policy review on May 19.