Space is narrowing down for adaptation policy in the Philippines

The governor of the Central Bank of the Philippines said on Wednesday, a day before the policy meeting, that the room for maneuver to maintain the accommodative monetary policy of the Central Bank of the Philippines has narrowed, and that the authorities are ready to make adjustments.

The governor of Bangko Sentral ng Pilipinas (BSP), Benjamin Diokno, said the faster-than-expected growth of the national economy in the first quarter, at an annualized rate of 8.3%, and ongoing downside risks “reinforce the case for cash withdrawals and policy adjustment.”

BSP is expected to raise the rate of its overnight repo facility 25 basis points to 2.25% on Thursday to curb rising inflationary pressures, according to most economists polled by Reuters May 12-16.

“The effects of the second round are starting to show,” Diokno said, referring to inflationary pressures that pushed the headline annual figure to 4.9% in April, well above the 2%-4% target range this year.

“Inflationary pressures now seem more likely to persist and threaten to disappoint inflation expectations,” he said.

Thursday’s rate hike will be the BSP’s first since 2018.

Diocno said average inflation could stand above 4% this year, but should fall back to the same target range of 2% to 4% in 2023.

Economists polled by Reuters also expect the basic payment plan to accelerate at the pace of tightening, with a majority expecting the benchmark rate to fall to 2.50% by the end of September, while others expect it to reach 2.75% or more.

More rate hikes to come, with rates rising to 3.00% by the end of 2022, according to the median of a Reuters poll, from 2.50% projected in the previous poll.

Diokno said any policy adjustments would be made “in due course” but did not give a detailed timetable.

BSP cut interest rates by a cumulative 200 basis points in 2020 to help revive an economy that has plunged into recession due to prolonged and severe COVID-19 lockdowns.