With local inflation trending higher, the Bangko Sentral ng Pilipinas (BSP) is likely to veer away from interest cuts anytime soon, economists said.
It was earlier reported that the country’s inflation rate accelerated to 3.5 percent year-on-year in December from 3.3 percent in November.
With the BSP itself suggesting that the uptick in consumer prices would be felt throughout the first half of 2021, JP Morgan economist Milo Gunasinghe said supply-side disruptions would likely linger for longer than anticipated. As such, JP Morgan adjusted its headline inflation forecast higher for the first quarter to 3.8 percent from 3.4 percent, although the house view was that the fragile economic recovery and the transitory nature of the typhoon-related disruption would likely ease pressures in the second quarter.
“With headline inflation set to remain elevated in the coming months and policy rates at 2 percent following 200 basis points of cuts in 2020, we think that the BSP will likely remain on hold with its accommodative stance potentially expressed in the form of further RRR (reserve requirement ratio) cuts although its impact may likely be limited, in our view,” Gunasinghe said.
BPI lead economist Emilio Neri said there were risks that the country’s inflation rate could hover above 3 percent in the coming months, while the distribution of vaccines around the world in 2021 might lift global demand and push oil prices higher.
But even at current levels of $47 per barrel, Neri said oil prices were expected to rise by 180 percent year-on-year in the second quarter given the low base from last year. Meanwhile, he noted that supply constraints, especially in the meat sector, would likely continue this 2021 since it’s going to take the swine industry some time to address the impact of the African swine fever.
“With inflation now approaching the 4 percent level, the possibility of another rate cut in the coming months has declined further. Cutting the policy rate will expand its negative gap with inflation,” Neri said.
In a worst-case scenario, Neri said elevated inflation in 2021 might force the BSP to hike rates at a time the economy continued to see year-on-year declines. But if fiscal stimulus could complement monetary easing, he said BSP could hike rates with minimal interruption on the growth recovery, and limited damage on markets.
—DORIS DUMLAO-ABADILLA