Key policy rate held at 6.25%

PHILIPPINES - In Brief 18 May 2023 by Romeo Bernardo

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After raising its set of policy rates by 425bp since May last year, the Monetary Board decided today to pause monetary tightening, keeping the overnight RRP rate at 6.25%. The decision is based on the BSP’s forecast of a gradual decline in inflation to target by 4Q, inflation expectations for 2024-25 returning to target range, moderation in demand indicators in part reflecting previous rate increases, as well as government actions to ease constraints on food supply. The BSP revised down its inflation forecast from 6.1% to 5.5% for 2023 and from 3.1% to 2.8% for 2024 but noted that the balance of risks is still tilted to the upside due to persistent constraints in supply of key food items, prospective El Nino impact on food prices, and possible additional adjustments in transport fares and wages. Based on the latest assessment, Governor Felipe Medalla said that barring shocks either to local inflation or from the US Fed, domestic monetary policy is likely to stay neutral for the next 2-3 policy meetings. As to cutting the reserve requirement ratio (RRR), he said that this may be done in conjunction with the expiry of the reserve eligibility of bank loans to small businesses at the end of June. The latter, if not extended, would be equivalent to tighter policy settings and offsetting action may be needed to remain neutral. The offsetting action could be a cut in the RRR by 200bp or other open market operations to maintain money supply. In the event of a cut in the RRR, he said that the move should be seen as an operational rather than a monetary policy action.