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After taking note of signs of a persistent slowing in domestic inflation, the Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) retained the central bank’s benchmark rates for the second rate-setting meeting.

With the most recent MB decision, the BSP’s overnight deposit rate, overnight reverse repurchase (RRP) rate, and overnight lending rate all stay at 5.75 percent, 6.25 percent, and 6.75 percent, respectively.

In a briefing on Thursday, BSP Governor Felipe Medalla noted that although the average inflation for next year was slightly revised up due largely to the ongoing reopening of the economy, the inflation rate is expected to continue slowing until at least 2025.
“While the domestic growth momentum is expected to remain intact over the near term, recent demand indicators suggest a likely moderation in economic activity over the policy horizon, reflecting the impact of the BSP’s cumulative policy rate adjustments as well as weak global growth prospects,” the official stated.

The MB meeting last May 18 saw the first maintenance of the BSP’s key rates.

At the May MB rate-setting meeting, the projected inflation rate 2023 was reduced from 5.5 percent to 5.4 percent.

The prediction for 2024, on the other hand, was increased from 2.8 percent to 2.9 percent.

The forecasted rate for 2025 is 3.2 percent, which was arrived at after considering, among other things, potential interest rate trajectory and salary adjustment assumptions.

During the same occasion, BSP Deputy Governor Francisco Dakila Jr. stated that the average inflation forecast for 2024 has been updated in light of the economy’s ongoing recovery and the effects of a more hawkish Federal Reserve.

“An more open economy means that economic activity is higher, and demand forecasts are stronger now than they were at the May meeting, of course. That might affect costs in some way, he said.

However, Medalla clarified that “the main source of inflation is not the opening of the economy” but rather than the effect of supply shocks on the rate of price increases.

So, he said, “Truly, this inflation is supply-driven.”

The head of the central bank claimed that since last February, monthly inflation has been growing more slowly as monetary authorities have observed that the worst supply shocks have passed.

The domestic inflation rate decreased to 6.1 percent last May from a 14-year high of 8.7 percent last January.

In the final quarter of this year, according to BSP officials, this will fall inside the government’s target range of 2 to 4 percent.

When asked if the prolonged slowdown in inflation is a consideration for a reduction in the BSP’s main rates shortly, Medalla said he prefers to wait until there have been at least two months in a row with an inflation rate below 4 percent before evaluating a potential rate decrease.

He stated that more information is still required to determine the effects of a potential reduction in the Federal Reserve’s key rates.

Although developments in the inflation rate have been the primary factor in the BSP’s key rate decision up until this point, according to Medalla, it would be difficult to avoid adjusting rates in the event that the Federal Reserve cut its key rates by 50 basis points due to the impact on the peso.

He continued, “The mistake of cutting too soon is much more terrible than the mistake of cutting too late.

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