BSP seen keeping interest rates unchanged for the rest of 2021 | Inquirer Business
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BSP seen keeping interest rates unchanged for the rest of 2021

/ 05:14 AM May 28, 2021

The Bangko Sentral ng Pilipinas (BSP) is likely to keep its key interest rate unchanged for the rest of this year despite the disappointing pace of economic recovery amid a prolonged coronavirus (COVID-19) pandemic-induced recession.

This is according to Citi economist for the Philippines Nalin Chutchotitham, who projected that the BSP’s overnight borrowing rate would be kept at 2 percent until early next year, at the latest, even as demand-pulled inflation would likely stay subdued.

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In a recent research note, Citi said it was expecting the BSP to look through the supply-side risks for now in favor of supporting economic recovery. “We doubt that the BSP would reduce its policy rate further, given adequately flush liquidity in the banking system,” Chutchotitham said.

The economist pointed out that bank lending in the country continued to contract year-on-year for the third month in a row in March (-4.5 percent), while domestic liquidity continued to grow at 8.3 percent year-on-year. The research cited the BSP’s optimism on economic recovery, mainly supported by fiscal policies, vaccine rollout, and global economic improvement, despite of some concerns over private sector confidence.

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While the country’s inflation rate remained at 4.5 percent in April—versus the BSP’s cap of 4 percent , the economist noted that food inflation was no longer accelerating, except for meat, leading to the softening of core inflation.

The BSP earlier lowered its inflation forecast for 2021 to 3.9 percent from 4.2 percent mainly in view of the pork tariff reduction.Citi is thus keeping its inflation forecasts at 4.2 percent for this year and 2.5 percent for 2022.

“The tight meat supply situation may remain for some time, as the African swine fever remains, while there are also some upside risk on energy prices,” the research said.

Citi also maintained a gross domestic product (GDP) forecast of 4.9 percent for this year and 6.8 percent for next year. This is coming from a very low base in 2020, when the domestic economy contracted by 9.5 percent, the steepest decline seen in history. While the first quarter results disappointed, Citi said the relaxation of lockdown in Manila had come earlier than thought, while new COVID-19 cases eased in May, albeit still at high level.

GDP shrank by 4.2 percent year-on-year in the first quarter, marking a fifth consecutive quarter of economic contraction.

The research noted that Greater Metro Manila’s return to strict pandemic restrictions at end-March hurt activities in the capital and nearby areas.

Meanwhile, Citi said the faster reopening of businesses and acceleration of vaccination could help improve economic activities in late second quarter and second half of 2021.

Citi had earlier expected Metro Manila to remain under strict quarantine through June. But the lockdown status was relaxed since mid-May. This brought the quarantine status close to what was seen at the beginning of the year, with about 20 percent indoor dining allowed, but with most entertainment venues still closed. “Vaccination progress has been relatively slow but will likely pick up after new orders arrive,” the research said.

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TAGS: Bangko Sentral ng Pilipinas (BSP), Interest rates‎, Nalin Chutchotitham
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