THE central bank will ensure that its exit from accommodative policy, taken to support the economy during the pandemic, is balanced to respond to bothflgrowth risks and the need to sustain growth, said Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.
“In deciding its exit strategy, BSP will continue to aim for a balance between providing adequate stimulus to fuel the momentum of economic recovery while preventing inflationary pressures from building up and risking the soundness of the financial system. “said Mr. Diokno. said Friday during a virtual forum of the Asian Development Bank Institute.
The Monetary Council decided to raise key interest rates by 25 basis points (bp) to 2.25%.
At the same time, the BSP revised upwards its average infIration forecast for 2022 at 4.6% compared to the previous 4.3%, exceeding the target range of 2% to 4%. For 2023, the central bank’s inflation forecast has risen slightly to 3.9% from 3.6% previously.
The start of the BSP tightening cycle came one week a weekFafter the release of data showing that gross domestic product (GDP) grew by 8.3%, better than expected, in Iffirst trimester.
PASB will ensure that its exit strategy is gradual, well-communicated and results-based, Diokno said.
“BSP will commit to exit when it begins to see evidence of a sustainable recovery and/or increased risk forFtion. And we started our release since yesterday,” he added.
Analysts said the BSP could have raised rates sooner.
Former BSP Deputy Governor Diwa C. Guinigundo, while welcoming the rate hike, said an earlier decision could have produced a more gradual normalization of monetary policy.
“AFAfter all, even (with a) 50 bps “tightening” it is still in dovish mode. This would have brought the policy rate down to just 3.0% when their new inflation forecast is now 4.6% this year and 3.9% next year,” Guinigundo said in a Viber message. .
“These numbers just say we failed to stop it in time, orFthe pressures from nationhood beyond our control were just too much,” he added.
Guinigundo also said manifestations of second-round effects from high oil prices could have encouraged the central bank to act quickly.
UnionBank of the Philippines, Inc. chief economist Ruben Carlo O. Asuncion said the rate hike was already overdue from the perspective of market participants.
“Benchmark rates for the benchmark 10-year security have already risen … by more than 150 basis points since the start of 2022. This number is indicative of what the market thinks where rates should already be,” said Mr. Asuncion in an email.
However, Mr Asuncion noted that the central bank needed to ensure that its accommodative policy was gaining traction before making its decision.
“The BSP is a prudent central bank and it will always be guided by data and the corresponding consequences on future inflation,” Guinigundo said.
“But there is a sort of economically logical inference of how recent readings of key variables could (influence) inflation and the output gap,” he added.
Security Bank Corp. chief economist Robert Dan J. Roces said the change in policy signals how much more threatening inflation is becoming.
“I think the action is timely; second-round effects, including higher-than-expected wage increases and demands for higher transport fares, reinforce the view of inflation, and therefore policymaking should strike a balance between supporting resuming growth and protecting consumption from the threat of inflation,” Roces said in a Viber message.
Guinigundo said the new monetary stance could continue until there is a turnaround in the inflation forecast.
“How much more aggressive or temperate will be driven by both inflation and output leading indicators and actual monthly inflation as well as second-quarter GDP,” Guinigundo said.
“On top of that, the market will need to be convinced that monetary authorities are serious about preventing a price spike that we unfortunately seem to have seen in recent months,” he added.
PROVISIONAL DIRECT ADVANCES
Meanwhile, the national government on Friday settled the zero-interest loan of 300 billion pesos that it had obtained from the BSP.
The interim direct advances were originally due to expire on June 11.
Provisional advances are authorized by law and have been “considered an extraordinary measure for extraordinary times”, Mr Asuncion said.
But according to Mr Guinigundo, extending these temporary direct advances to the national government could “affect the perception of BSP’s independence”.
He said central banks that are perceived to be more independent have proven to be more effective in managing inflation.
“BSP’s reputation took years to build; it might be useful to preserve it, if only to ensure its success in carrying out its key mandate of promoting price stability and financial stability consistent with sustainable economic growth,” he said. added.
PASB’s next policy review will take place on June 23. — Keisha B. Ta-asan