Space narrowing for Philippines’ accommodative policy

MANILA, May 18 (Reuters) – The space for maintaining the Philippine central bank’s accommodative monetary policy has narrowed and authorities stand ready to make adjustments, its governor said on Wednesday, a day ahead of its policy meeting.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the domestic economy’s faster-than-expected growth in the first quarter, at an annual pace of 8.3%, and ongoing downside risks “strengthen the case for a withdrawal of monetary policy accommodation”.

The BSP is expected to raise the overnight reverse repurchase facility rate PHCBIR=ECI by 25 basis points to 2.25% on Thursday to curb rising inflationary pressures, according to most economists in a May 12-16 Reuters poll.

“Second-round effects are starting to manifest,” Diokno told a media briefing, referring to the inflationary pressures that drove the annual headline figure to 4.9% in April, soaring above the 2%-4% target band this year.

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

A rate rise on Thursday will be the BSP’s first since 2018.

Diokno said average inflation could settle above 4% this year, but is expected to drop back within the same target range of 2%-4% in 2023.

Economists in the Reuters poll also expected the BSP to pick up the tightening pace, with a majority anticipating the benchmark rate to rise to 2.50% by end-September, while the rest predicted it will reach 2.75% or higher.

More interest rate rises are on the way, with rates reaching 3.00% by end-2022, the Reuters poll median showed, up from 2.50% predicted in the previous survey.

Diokno said any policy adjustment will be done “in a timely manner” but did not give a detailed timeline.

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

(Reporting by Neil Jerome Morales and Enrico Dela Cruz; Editing by Martin Petty and Kanupriya Kapoor)