The central bank is widely expected to keep its key interest rate unchanged when its policy-making Monetary Board convenes on Thursday with the regulator finding itself lodged between the opposing demands of fighting rising inflation and restarting the country’s economic growth.
The Bangko Sentral ng Pilipinas (BSP) may even end up leaving its overnight borrowing rate—which banks use as a guide for pricing their own loans—untouched at present levels for the rest of 2021.
“Inaction is action,” Nicholas Mapa, senior analyst of ING Bank Manila, said of the monetary regulator’s most likely move while being “caught between a rock and a hard place” due to the the unexpectedly high January inflation rate and the worst economic contraction in postwar Philippines last year.
“Gov. [Benjamin] Diokno quickly moved to snuff out any expectations for a rate hike, citing the sources of inflation as his reason for the likely pause,” the economist said. “As such, a rate hike at this point would do little to make pork or chicken meat cheaper or the price of global crude oil fall.”
At the same time, he pointed out that a rate increase to fight off the accelerating price increases of basic goods ans services, “with the economy still mired neck deep in recession, would derail the recovery efforts both by signaling a reversal in policy stance and make it even more difficult for cash strapped households and firms to access much-need funding.”
The central bank chief is aware of the limits of monetary policy and, as such, “will be more circumspect in his actions to make every policy move count,” Mapa said.
Temporary phenomenon
Last week, the central bank reassured that the unexpected spike in January’s inflation rate, which came in above all forecasts of government policymakers and private sector economists, was a temporary phenomenon that will not cause the annual average to exceed the official target range.
It noted that last month’s consumer price index of 4.2 percent was largely caused by supply-side pressures related to the African swine fever outbreak that pushed local pork prices higher. Also contributing to the faster price increases were weather-related disturbances, higher global oil prices and the base effect of coming from a low inflation rate in the same period last year.
Mapa said he expected the central bank not to repeat the mistakes of 2018 when, during a spike in rice prices, the monetary regulator “unleashed a string of moves that confounded market players, hiking policy rates but simultaneously releasing tons of liquidity into financial markets.”
“The series of moves did little to quell inflation nor allay concerns about accelerating prices gains, culminating in a severe breach of the inflation target and, just as detrimental, a broadside to bank lending momentum that impaired capital formation for months to come,” he said.
“At this juncture keeping policy rates unchanged would allow BSP to provide the economy support for the recovery while at the same time safeguard against any budding demand side pressure, which appears to be negligible at the moment,” he said.
After inflation jumped to a two-year high in January, most private economists expect the Bangko Sentral ng Pilipinas’ Monetary Board to keep the record-low policy rate of 2 percent when it meets on Thursday.
Following a cumulative 200-basis-point (bp) cut in interest rates last year amid a pandemic-induced record 9.5-percent economic contraction, Moody’s Analytics on Monday said the BSP had “limited options but to wait for the returns from expansionary monetary policy to materialize in 2021, once local restrictions are fully relaxed.”
Moody’s Analytics said it believed the BSP already delivered enough liquidity injection last year.
“The headline [inflation] rate is set to climb further in the coming months, driven by pork shortages due to the swine fever outbreak and a sharp rise in fuel and transport price inflation as last year’s collapse in global oil prices enters the annual comparison. This should give the central bank reason to pause its easing cycle for now,” Gareth Leather, Capital Economics senior Asia economist, said in a Feb. 5 report.
“With price pressures set to fall back later in the year and the economy in need of further support, we still expect more cuts. We are sticking with our forecast for 50 bps of easing this year, probably in the second half of 2021,” Leather said. INQ