MANILA (UPDATE 2) — The Bangko Sentral ng Pilipinas (BSP) on Thursday kept its policy rate at the current level after inflation slowed down for a sixth straight month in July.

BSP Governor Eli Remolona said the Monetary Board kept the benchmark overnight reverse repurchase rate at 6.25 percent.

Remolona said the central bank still expects inflation to return to the target range of 2 to 4 percent in the fourth quarter despite the recent impact of higher international oil prices.

The BSP, however, also raised its inflation forecast for this year to 5.6 percent from an earlier forecast of 5.5 percent. The forecast for 2024 was also raised to 3.3 percent from 2.8 percent.

“Meanwhile, inflation expectations for 2023 have remained steady, while those for 2024 and 2025 have declined slightly,” he said during the BSP briefing.

Inflation eased in July to 4.7 percent after hitting a 14-year high of 8.7 percent in January.

The BSP noted that inflation may quicken due to the impact of possible fare hikes, the recent wage hikes, persistent food supply problems, and the effects of El Niño on food prices and power rates.

“Meanwhile, a weaker-than-expected global economic recovery remains the primary downside risk to the inflation outlook,” the BSP said.

Watch more News on iWantTFC

Philstocks Financial research manager Japhet Tantiangco said the BSP is keeping a balanced tone amid the country’s tepid growth and a possible quickening of inflation.

“If you’re going to talk about second quarter GDP alone then maybe the BSP may have lowered policy rates. Then again, we also have this inflation picture that we are dealing with,” Tantiangco said.

But there is also a limit on what the central bank can do to tame inflation as interest rates can only influence demand, Tantiangco added.

“Many of the upside risks to inflation that we are seeing right now are coming from the supply side,” he said.

He noted that there are possible “food shocks” from the effects of El Nino, the tightening of rice exports by some countries, as well as rising oil prices.

The BSP's move was in contrast to the US Federal Reserve's decision to raise its benchmark interest rate by another 25 basis points to the highest level in 22 years.

Finance Secretary and Monetary Board Member Benjamin Diokno earlier said he did not see the need for the Philippines to match the rate hike by the US Federal Reserve.

Tantiangco meanwhile noted that if US interest rates are placed alongside its inflation data, the US has a positive interest rate. In contrast, the Philippines has a negative interest rate with the country’s average inflation rate for the year so far at 6.8 percent, and the BSP benchmark at just 6.25 percent.

He said If the Federal Reserve is going to further raise its policy rates then capital may flow out of the country and into the US, and this will further weaken the peso.

A weaker peso will make imports more expensive, including food imports, which may in turn affect inflation, Tantiangco said.

The central bank has raised borrowing costs by 425 bps from May 2022 to March 2023, bringing the key interest rate to a near 16-year high.

Easing inflation has allowed the BSP to pause rate hikes in April.

High interest rates have affected private consumption and investment, leading to a slower-than-expected GDP growth of 4.3 percent in the second quarter. This was slower than the 6.4 percent expansion in the first quarter and 7.5 percent a year ago.

The weak second-quarter growth dragged the first half average to 5.3 percent.

Economic managers earlier said GDP growth should hit at least 6.6 percent in the second half to achieve the country's 6 to 7 percent target for 2023.

• BSP keeps interest rate steady at 6.25 percent
• BSP to cut reserve requirement for banks by 250 basis points