Analysts: Bite from inflation to prevent BSP from tweaking rates

The inflation-targeting Bangko Sentral ng Pilipinas (BSP) is widely expected to keep its key interest rates steady this year as fresh consumer price spike threats emerge amid a muted economic recovery.

Given food supply shortages arising from the typhoons that affected agricultural production, the damage caused by the African swine fever and the steady rise in global energy prices, ING economist Nicholas Mapa expects the country’s January inflation to settle at 3.8 percent. The BSP’s 4-percent upper end inflation target could be under threat as early as April or May, he added.

Mapa also expects the economy to remain in recession this first quarter, until a base effect-induced surge in gross domestic product (GDP) happens in the second quarter of 2021.In the fourth quarter of 2020, Philippine GDP contracted by 8.3 percent year-on-year, bringing the full-year decline to 9.5 percent. This was the first recession seen by the county since 1998 and the decline was the steepest in recent history.

“Complicating matters for this challenging year would be the return of BSP’s nemesis, inflation, which should whittle down what little purchasing power is left to already challenged households. Despite the facade of accelerating GDP growth, the Philippine economy remains in a fragile state of recovery with quarter-on-quarter growth expected to slow at a time wherein a sharp acceleration in prices will likely make 2021 even more challenging,” Mapa said in a research note.

“BSP will likely refrain from adjusting policy rates soon in the near term as it works with fiscal authorities to ride out this impending episode of inflation while still providing as much support it can muster to bolster the recovery effort,” he added.

Bank of the Philippine Islands lead economist Emilio Neri Jr. said the GDP would likely still contract, albeit mildly in the first quarter. But assuming the government would not impose additional lockdown measures, he said a double-digit growth may be possible during some quarters of 2021, bringing the full-year growth to 6.8 percent. “However, even at this brisk pace, economic output will not be able to return to the 2019 level yet, and a full recovery may only happen in 2022. On the other hand, uncertainties still remain and another lockdown may prevent the economy from reaching more than 6 percent growth,” he said.

Local bond yields are seen to remain low in the near term given the monetary support expected from the BSP. However, Neri cited high risks related to inflation and the exchange rate, which would prevent the BSP from pursuing further policy rate cuts and debt monetization in the near term.

“Supply disruptions and a lingering livestock sector pandemic have kept food prices elevated. Prices remain vulnerable to a surge in transport costs, trade restrictions and weather disturbances,” he said.

In a separate research note, British banking giant HSBC also said it was not expecting any further policy rate cuts from the BSP despite the risk of a slow recovery this year. It said inflation had edged up over the past two months and at risk of breaching the BSP’s 2-4 percent target range in the quarters ahead. INQ