BSP expected to keep key rates steady

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to hold key interest rates steady when its policy-making Monetary Board meets on Thursday (March 25) as the burden of reviving the pandemic-battered economy would outweigh concerns on elevated inflation at a time when COVID-19 cases surged.

“We expect the Philippines’ central bank to keep its key overnight borrowing rate unchanged at 2 percent. The near-term prospects remain worrisome for the Philippines as it copes with an intensifying virus outbreak that shows no signs of abating,” Moody’s Analytics said in a report Monday.

“Although the country’s fiscal spending has been more conservative relative to its Southeast Asian counterparts, the scope to deliver through a more expansionary monetary stance is relatively limited at this stage. We expect that the central bank will opt to preserve ammunition for now and stall a rate cut until the next quarter if the domestic situation deteriorates,” Moody’s Analytics added.

Also on Monday, Pantheon Macroeconomics senior Asia economist Miguel Chanco noted that BSP Governor Benjamin Diokno had been “consistent about the escalation in food price pressures, deeming them supply-side issues outside the realm of monetary policy.”

End-February headline inflation already averaged 4.5 percent or beyond the 2-4 percent target range mostly due to expensive food, especially pork.

“Nevertheless, we expect [Monetary Board] members to take a much more hawkish tone, in view of the stronger upward pressures oil prices will soon exert directly and indirectly, via second-round effects,” Chanco said.

London-based Capital Economics last Friday said the BSP was “stuck between a rock and a hard place” as senior Asia economist Gareth Leather and Asia economist Alex Holmes projected “inflation is set to rise further over the next couple of months as the impact of last year’s collapse in global oil prices enters the annual comparison.”

It did not help that “a surge in new virus cases will hold back the recovery,” such that Capital Economics sees a sharp slowdown in quarter-on-quarter gross domestic product (GDP) growth during the first half.

“The unemployment rate—which the central bank has indicated it will keep a close eye on—is likely to remain stubbornly high,” Capital Economics said. The jobless rate of 8.7 percent—equivalent to four million unemployed Filipinos—in January was a 16-year high across the survey rounds conducted at the start of each year.

“High inflation mean rate cuts are unlikely in the near term. But provided the recent rise in inflation proves temporary, as we and the central bank expect, then the door could be open for further easing later in the year,” Capital Economics said. It had projected 50 basis points in interest rate reduction during the second half of 2021.

With elevated inflation, high unemployment and a prolonged recession, Security Bank Corp. chief economist Robert Dan Roces on Friday said “the BSP will still be doing the heavy lifting to support the economy, as the fiscal side will remain challenged with tepid revenue collections on soft economic activity and therefore remain prudent.”

“And as policy rate adjustments operate with a lag, this means that the November rate cut has yet to be fully felt. Relative to inflation spikes, the BSP Governor has repeatedly sounded-off on the appropriateness of non-monetary measures to slow inflation given the supply-side nature of the price growth trajectory that may be transitory,” Roces said.

In a March 19 report, HSBC Global Research noted that in the Philippines, “bank lending has declined on a year-on-year basis for the first time since the global financial crisis, despite record-low interest rates, given ongoing uncertainties to the economy.”

As such, HSBC said “additional rate cuts are neither necessary nor effective at the current juncture.”

For ING senior Asia economist Prakash Sakpal, the BSP “will see through inflation and instead focus on growth.”

“In the process, we see the BSP leaving the interest rate policy on hold throughout 2021,” Sakpal said in a March 18 report.