Price hikes likely to remain muted as Aug. inflation comes in below BSP’s forecast

MANILA, Philippines — Price pressures on basic goods and services will likely remain muted over the near term, according to the central bank, as it welcomed the lower-than-expected August inflation rate which came in below the monetary regulator’s own forecast.

In a statement to the media, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the August inflation rate of 2.4 percent was lower than the BSP’s forecast range of 2.5-3.3 percent, “but is consistent with the expectation that inflation will remain benign over the policy horizon.”

“The balance of risks tilts toward the downside owing largely to potential disruptions to domestic and global economic activity of the ongoing pandemic,” he said.

On Friday, the government announced that headline inflation eased in August from 2.7 percent in July, which brought the year-to-date average to 2.5 percent. This was primarily due to the deceleration in the inflation for the heavily-weighted food and non-alcoholic beverages which slid at an annual rate of 1.8 percent during the period, from 2.4 percent in the previous month.

Given this scenario, the central bank said that the prevailing interest rate environment and ample liquidity in the financial system — reflecting the significant monetary policy easing and liquidity enhancing measures undertaken thus far by the BSP — are seen to provide sufficient support to economic activity.

To date, the central bank has cut its key interest rate by a total of 175 basis points during the course of the coronavirus pandemic, reduced banks’ reserve requirement ratio by 200 basis points, extended a slew of relief measures for financial institutions, and lent the Philippine government some P300 billion through direct bond purchases. All told, the BSP has infused an estimated P1.3 trillion into the domestic financial system to buttress the economy.

As such, Diokno said that “early signs of recovery in domestic activity are being noted, with further improvements expected as containment measures are relaxed further, and firms and households adjust better to the post pandemic operating environment.”

“The BSP will continue to evaluate the transmission of the BSP’s policy actions to the economy along with the recently approved fiscal measures to address the public health crisis,” he added, as he affirmed that the central bank “stands ready to deploy all available measures in its toolkit in fulfillment of its policy mandate as it continues to assess the impact of the global health crisis on the domestic economy.”

The next meeting of the central bank’s policy making Monetary Board to decide on interest rates is scheduled for Oct. 1, but Diokno had earlier signaled that he will wait for the economy to digest all the liquidity that had so far been released into the system this year before acting further.

JPV