The Bangko Sentral ng Pilipinas (BSP) is likely to keep its key interest rates unchanged for the rest of the year, looking past higher-than-expected inflation rate to focus on oiling the coronavirus (COVID-19)-ravaged economy.
This was according to London-based think tank Fitch Solutions, which expected the BSP to resume its monetary tightening cycle in 2022 as the economic recovery gathers steam, taking the key policy rate to 2.75 percent by the end of next year from 2 percent at present.
Fitch Solutions was originally projecting a modest 25-basis-point interest rate increase this year, but changed its view as the domestic economy grapples with the return to tighter lockdown measures as COVID-19 cases surged in March.
Supply-side disruption
“We expect the BSP to look past elevated inflation and instead focus on a sustained recovery in demand-side price pressures and credit growth,” Fitch Solutions said in a recent research note. During its March 25 monetary policy meeting, the BSP’s Monetary Board kept the benchmark rates unchanged even as it acknowledged that upward inflationary pressures were likely to stay in place over the coming months due to supply side disruptions caused by the coronavirus outbreak.
A combination of rising pork prices due to African swine fever and supply-chain disruptions from the pandemic led to a surge in headline inflation, alongside external factors such as rising commodity prices. In February, year-on-year inflation hit 4.7 percent, overshooting the BSP’s inflation target of 2-4 percent. Fitch Solutions said it expected inflationary pressures to remain in the near term, driven by supply-side factors. It projected inflation to average at 4 percent through 2021 and ease to 3.4 percent in 2022.
“That said, the BSP will look to the slow domestic recovery as reason to keep monetary policy accommodative, particularly with uncertainty around the pandemic still high,” Fitch Solutions said.
Easy monetary policy
Last year, the Philippine economy fell into a recession for the first time since 2008 at the peak of the Asian currency turmoil. Gross domestic product (GDP) contracted by 9.5 percent amid mobility restrictions and economic uncertainties arising from the pandemic.
Fitch Solutions has forecast the BSP to keep monetary conditions loose as domestic activity remained below prepandemic levels and spare capacity still large.
“Compounding this is the lack of credit growth despite loose monetary conditions,” the think tank said.
From a contraction of 0.3 percent in 2020, Fitch Solutions expected lending activities in the country to only gradually recover over the course of the year—hitting 8 percent by year’s end—given still high perceptions of credit risks.
Consumption-driven
“We expect the economy to be in recovery by late-2021 and through 2022, leading the BSP to begin gradually hiking its key policy rate,” Fitch Solutions said.
The Philippine economy remains highly dependent on a resurgence in domestic consumption and Fitch Solutions sees demand to pick up through the second half of 2021 and 2022, supported by growing credit and loose fiscal policy. “The BSP can hike slowly given the Philippines’ relatively strong external position and the high levels of spare capacity caused by the sharp recession. Indeed, we have flagged the country’s rising reserves buffer and low exposure to foreign investor sentiment as factors giving the BSP leeway to run looser monetary policy for longer without the Philippine peso depreciating sharply,” Fitch Solutions said. “As such, we expect the rate-hiking cycle to be gradual, with the BSP waiting for the recovery to be on a more stable footing.” INQ