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The Philippine monetary authorities on Thursday kept the Bangko Sentral ng Pilipinas (BSP) policy rates unchanged after increasing key rates for nine straight rate-setting sessions starting in May 2022, primarily due to a slow down in inflation.

Thus, the overnight reverse repurchase (RRP), overnight repurchase (RP), and overnight deposit rates are unchanged at 6.25 percent, 6.75 percent, and 5.75 percent, respectively.

BSP Governor Felipe Medalla said in a briefing on Thursday that the Monetary Board decided that a halt in tightening monetary policy was justified based on the totality of fresh information and its assessment of the impact of prior monetary policy initiatives.

After raising the benchmark rates from a record-low 2 percent, the policy-making MB paused rate-tightening actions on Thursday. The upward adjustment was made to help confront increases in the inflation rate.

In comparison, the MB reduced the central bank’s projections for this year’s average inflation from 6 percent to 5.5 percent and for 2024 from 3.1 percent to 2.8 percent.

Inflation will “continue to reflect a gradual return to the target band of 24 percent over the policy horizon,” according to Medalla.

For 2024 to 2025, he claimed that inflation projections “are steady and within the target range.”

While domestic expansion has been strong in the first three months of this year, he pointed out that “demand indicators have also pointed to a potential moderation in recent months, suggesting that previous policy rate increases by the BSP continue to work their way through the economy.”

He added that the Board is “encouraged by the recent mounting of whole-of-government actions to ease constraints on food supply.”

However, he noted that “core inflation has only slightly eased” even though “headline inflation has continued to decelerate with slower increases in the prices of food and energy-related items.”

Last January, the domestic inflation rate reached a 14-year high of 8.7 percent, but it has since dropped, with the April figure currently at 6.6 percent, down from the previous month’s 7.6 percent.

When volatile oil and food prices are excluded, core inflation, which was 7.9% in April of last year compared to 8% in the previous month, is nearly unchanged.

Starting as early as September of this year, the inflation rate is anticipated to drop to within-target levels.

The balance of risks to the inflation outlook, according to Medalla, “remains largely tilted to the upside due to persistent supply constraints in key food items, the potential impact of El Nio on food prices and utility rates, as well as the effects of possible additional adjustments in transportation fares and wages.”

He argued that the less rapid than anticipated global economic rebound offsets these.

The Monetary Board believes that maintaining the policy interest rate at its current level over the short term is necessary due to the persistent pricing pressures, which continue to necessitate constant observation. In light of tighter global financial conditions, a sensible pause enables monetary authorities to predict better how macroeconomic and financial conditions will change.

According to Medalla, developments in inflation, their inflation projections, and adjustments to the Federal Reserve’s key rates will all impact any changes to the BSP’s key rates.

“So, in short, neither a cut nor an increase in the next two or three policy meetings is the more likely scenario,” he said.

When asked if there will be any changes to the reserve requirement ratio (RRR) for banks as early as June this year, Medalla responded that this was always a possibility because the RRR for the country is still high and because the regulatory respite provided for loans to small and medium-sized businesses (SMEs) will expire at the end of June.

Until they mature, loans to medium- and small-scale industries are acceptable. Therefore, if we choose not to continue that approach, he stated that we will need to reduce our reserve requirements.

RRR for universal and commercial banks (U/KBs) decreased by 200 basis points in 2020 to 12 percent as part of the central bank’s initiative to promote lending during the pandemic to support economic activity.

Changes in the RRR, according to the head of the central bank, are caused by operations rather than monetary policy.

“We adjust the size of our facilities to ensure that such changes in the reserve requirement policy do not affect the money supply,” he continued.

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