October 13, 2021

Slower inflation allows the BSP to maintain its accommodating policy.

Last month’s drop in domestic inflation provided the Bangko Sentral ng Pilipinas (BSP) some breathing room in its accommodating policy stance, according to an economist.

The rate of inflation slowed to 4.8 percent last month, down from 4.9 percent the month before, which was the most since January 2019.

This move, according to ING Bank Manila senior economist Nicholas Mapa, provides the central bank “a bit more room to continue its accommodating posture.”

“Pressure has been growing on the BSP to raise rates sooner rather than later, but the unexpected inflation data helps the central bank defend its present position.” “Until concrete indications of a recovery are apparent, the BSP has signaled its desire to allow the economy a bit more breathing space to assist in the recovery,” he said in a report on Tuesday.

Inflation averaged 4.5 percent in the first nine months of this year, far over the government’s goal range of 2 percent to 4%.

Although average inflation is expected to be 4.4 percent this year, monetary officials expect inflation to decrease to within-target levels by the end of the year.

Inflation rates are expected to average 3.3 percent and 3.2 percent during the following two years, respectively.

The central bank’s main policy rates were cut by 200 basis points last year in an effort to cushion the domestic economy from the pandemic’s effects.

Governor Benjamin Diokno of the BSP has frequently said that the monetary authorities are committed to maintaining stable key rates in order to aid economic recovery.

The BSP has justified looking beyond the inflation goal violation because of the cost side nature of the price increases, according to Mapa, considering the fragility of the recovery.

“With global inflation being persistent, the BSP stays aware of global dynamics and will likely include them into its policy choices. “However, we fully anticipate the policy choice to be based solely on domestic circumstances,” he added.

“Should clear indications of an economic recovery emerge or if so-called second-round consequences (wage or transportation price increases) of inflation begin to manifest,” he said, the central bank “will likely consider slamming on the brakes.”

“We retain our base case assumption for the BSP to implement a well-timed gradual policy normalization by 2Q (second quarter) 2022, with the central bank most likely adjusting policy rates 50 basis points next year,” he added.

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