Slower inflation gives BSP space to keep accommodative policy

Slower inflation gives BSP space to keep accommodative policy

MANILA – Slowdown of domestic inflation rate last month gave the Bangko Sentral ng Pilipinas (BSP) extra respite vis-à-vis its accommodative policy stance, an economist said.

Inflation rate decelerated to 4.8 percent last month from the 4.9 percent in the previous month, which is the highest since January 2019.

ING Bank Manila senior economist Nicholas Mapa said this development gives the central bank “a little more space to maintain its accommodative stance.”

“Pressure has been building on the BSP to hike prematurely but the surprise inflation print helps the central bank justify its current stance. BSP has indicated its preference to give the economy a little more breathing room to aid in the recovery until clear signs of a recovery are evident,” he said in a report on Tuesday.

The average inflation in the first nine months this year stood at 4.5 percent, above the government’s 2 percent to 4-percent target band.

Monetary authorities forecast inflation to decelerate to within-target levels by the end of this year although average inflation this year is projected to be at 4.4 percent.

The average inflation rates in the next two years are forecast to be at 3.3 percent and 3.2 percent, respectively.

Last year, the central bank’s key policy rates were slashed off by a total of 200 basis points in a bid to help buoy the domestic economy from the impact of the pandemic.

BSP Governor Benjamin Diokno repeatedly stressed monetary authorities’ commitment to keep key rates steady to support economic recovery.

Mapa said given the fragility of the recovery, the BSP has justified looking through the inflation target breach, citing the cost side nature of the price spikes.

“With global inflation becoming more persistent, BSP remains cognizant of the global dynamics and will likely take these into consideration in its policy decisions. However, we fully expect (the) policy decision to center firmly on domestic conditions,” he said.

He added the central bank “will likely consider tapping on the brakes should clear signs of an economic recovery surface or if so-called 2nd round effects (wage or transport fare hikes) of inflation begin to manifest.”

“We maintain our base case scenario for a well-timed gradual policy normalization by the BSP by 2Q (second quarter) 2022 with the central bank likely adjusting policy rates 50 bps next year,” he said. (PNA)

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