A SIGNIFICANT reprieve and more money in the pockets of consumers, business owners and borrowers saddled with the high prices of goods and loans, that they could now save or spend on company expansion and jobs.
This was how business leaders in Cebu assessed the possible impacts of the decision of the Bangko Sentral ng Pilipinas’ Monetary Board (MB) to keep its key policy rate at 6.25 percent on the back of slowing inflation at 6.6 percent in April.
The pause in hikes comes after nine successive hikes in the BSP’s key interest rate since May 2022, aimed at reining in inflation following Russia’s invasion of Ukraine in February 2022 that has disrupted global supply chains.
“That’s much-needed breathing room,” said Charles Kenneth Co, president of Cebu Chamber of Commerce and Industry, Thursday, May 18, 2023.
Co welcomed the MB’s pause in hiking interest rates that comes on the heels of Visayan Electric’s reduction in electricity rates and oil and fuel prices going down from their all-time highs.
“The slowdown in inflation will hopefully put back some savings in the pocket,” said Co, noting that traders have reported a more than 20 percent drop in sales, especially in the construction and retail sector.
The April inflation rate of 6.6 percent is a deceleration from the inflation rate of 8.6 percent in February and 7.6 percent in March.
No hike
At its monetary policy meeting on Thursday, the MB decided to keep the interest rate of the Bangko Sentral ng Pilipinas’ (BSP) overnight reverse repurchase facility at 6.25 percent.
Accordingly, the interest rates on the overnight deposit and lending facilities were kept at 5.75 percent and 6.75 percent, respectively.
“Based on the sum of new information and its assessment of the impact of previous monetary policy actions, the Monetary Board decided that a pause in monetary policy tightening was appropriate,” the MB said.
“The Monetary Board also noted that while gross domestic product growth has remained robust in the first quarter of 2023, demand indicators have also pointed to a potential moderation in the recent months, suggesting that previous policy rate increases by the BSP continue to work their way through the economy,” the MB added.
The MB said the BSP’s latest baseline projections continue “to reflect a gradual return of inflation to the target band of two to four percent over the policy horizon.”
It said average inflation for 2023 is now projected to settle at 5.5 percent, lower than six percent previously, while the average inflation forecast for 2024 fell slightly to 2.8 percent.
Moreover, BSP’s inflation expectations for 2024 and 2025 are steady and within the target range.
Wise move
Entrepreneur Steven Yu said the BSP’s decision to retain the interest rate was a “very timely and wise decision.”
“The pause is a strong signal that the trend of inflation is stabilizing and cooling down, and this is a big respite to businesses after the successive increases. The pause is a significant reprieve for businesses from rising costs and will be a big boost to the confidence of the business community that the light at the end of the tunnel is near,” said Yu.
The BSP has hiked the policy rate by a cumulative 425 basis points to 6.25 percent since May last year to tame inflation and stabilize the peso.
Yu said the pause will allow business owners to “evaluate expansionary plans and go full throttle in their operations.”
For the banking sector, the pause prevents rising non-performing loans (NPLs), and banks will have more stability in their operations. Since increasing interest rates increase the cost of loans, NPL increases due to the poor loan repayment capability of borrowers on time.
For consumers, the pause will allow them to eventually enjoy lower costs of living. More jobs will also be made available as companies re-evaluate their expansion plans.
Not out of the woods
But amid this welcome development, Kelie Ko, president of Mandaue Chamber of Commerce and Industry, said the pause doesn’t mean “we are out of the woods.”
“Interest rates are still at levels that are not investment friendly. We need to see inflation rates within the target range before we see decreases in interest rates,” said Ko.
Earlier this week, BPI lead economist Emilio Neri Jr. said the country still needs to see both the headline inflation and core inflation (which excludes food and energy items) continue to head downward before the BSP should pause and eventually consider cutting the rates.
The MB acknowledged that even as headline inflation has continued to decelerate with slower increases in the prices of food and energy-related items, core inflation has only eased marginally.
It also noted that the balance of risks to the inflation outlook remains largely tilted towards the upside owing to persistent constraints in the supply of key food items, the potential impact of El Niño on food prices and utility rates, as well as the effects of possible additional adjustments in transportation fares and wages.
Given this, the MB said the BSP “will continue to monitor developments affecting the outlook for inflation and growth.”
The Central Bank also stands ready to “resume monetary tightening as necessitated by emerging data, consistent with its primary mandate to promote price and financial stability.”