BSP seen to keep policy rate steady

The Bangko Sentral ng Pilipinas (BSP) is likely to keep its key interest rate unchanged at 2 percent during its policy meeting on Thursday as the resurgence of COVID-19 cases threatens a fragile economic recovery, economists said.

In a research note issued on Tuesday, Citi economist for the Philippines Nalin Chutchotitham said that while food prices remained a concern and inflation was likely to overshoot the BSP’s 4-percent maximum target in the second quarter, weak employment would help keep domestic demand pressures in check.

“It may still raise its near-term inflation forecast on the back of higher global crude oil prices, but will likely highlight the downside risks to inflation on the back of weak economic recovery,” Chutchotitham said.

With COVID-19 cases returning to the peaks seen in mid-2020 —prompting the government to place more travel restrictions in Metro Manila and nearby regions for two weeks—Chutchotitham said the downside risks to 2021 economic growth forecasts remained, especially if the current restrictions would be prolonged amid a slow rollout of vaccines and containment of the COVID-19 spread.

To contain the spread of the virus, the government has limited traveling and prohibited mass gathering within Metro Manila and nearby provinces, such as Cavite, Bulacan, Laguna and Rizal, from March 22 to April 4. Essential travel for workers between workplace and home, and for government officials and health personnel may continue as usual while a few cities were placed under localized lockdowns.

International arrivals of foreigners and Filipinos who are not overseas workers have likewise been suspended from March 20 to April 19, except for emergency and medical cases.

Program acceleration

While the country has officially started its vaccination program on March 1 with about 1.1 million doses of vaccine supply—and 2.3 million more doses expected to arrive by early April—the Citi economist said acceleration would be needed amid an infection surge.

“Should harsh lockdowns similar to that in 2020 be required, even if more localized, economic recovery and fiscal deficit would likely worsen significantly,” she said.

The country’s inflation rate will likely hover above the central bank’s target of 4 percent until June this year, but key interest rates would likely be kept unchanged during this week’s monetary setting and for the rest of the year, said Alvin Arogo, vice president and head of research at Philippine National Bank.

In a recent briefing, Arogo said local inflation rate would likely ease starting July and reach a more manageable level of 2.6 percent by December this year.

The inflation rate overshot the BSP’s cap in January and February, with their respective prints of 4.2 percent and 4.7 percent, mostly due to the pork crisis.

For as long as the government would be able to execute its plan to boost pork supply by lowering pork tariffs and for as long as global oil prices would not shoot up past $80 per barrel, Arogo said inflation would ease and average at 4 percent for the full year.

Supply issue The first assumption on pork tariffs is within the government’s control, while the other variable is market-driven.

“This is really a supply side inflation and not an overheating economy, which means the solution is more on the supply side and not tightening of the monetary conditions,” Arogo said. “More importantly, raising the policy rate amid the fragile economy right now and low credit expansion is counterproductive.”

Given that the BSP also takes its cue from the US Federal Reserve—which has recently indicated that near zero interest rates would remain at least through 2023—the economist said there was no pressure for the local central bank to raise its interest rates.

Looking at 2018 or the last time inflation overshot the BSP’s target for 11 months, resulting in an annual average of 5.2 percent, Arogo said this similarity during this year was the shortfall in food supply. This year, the African swine fever has resulted in a shortage in pork, while in 2018, there was shortfall in rice supply.

“My view is the government has learned from its lesson from 2018 we can see DA (Department of Agriculture) quite fast in proposing temporary cuts inside and outside the MAV (minimum access volume) [of pork imports]. As long as that is implemented, our forecast will be met,” he said.