BSP seen firm on keeping interest rates steady
The Bangko Sentral ng Pilipinas (BSP) is expected to keep interest rates unchanged in the foreseeable future despite emerging pressures on the peso, which breached the P50:$1 level on Friday.
In a research note issued last week, JP Morgan economist Nur Raisah Rasid said the BSP would likely maintain its accommodative stance “to support demand, alongside targeted fiscal measures and the ongoing vaccine rollout.”
This developed as the Philippines announced a narrower trade deficit of $2.8 billion in May compared to $3.1 billion in April.
However, Rasid said the recovery in the Philippine importation of capital goods was thus far concentrated in telecommunication-related equipment, which cornered nearly half of total capital goods imports, reflecting the rise in demand for work-from-home needs and fiber network rollout. Nontelecommunication-related capital goods imports, such as power, remained sluggish.
“The trend in the nontelecommunication-related capital goods imports is key in accessing the breadth of overall economic activity recovery and the implications for growth and external balances,” Rasid said.
Trade gap to widen
But gradually, Rasid said the trend would be for the trade deficit to widen alongside the easing of lockdown measures.
“While COVID-19 infections have fallen, they remain elevated and exceed the peak of the first wave last year. However, mobility restrictions have loosened, and this paves the way for the resumption of activity and thus, the widening in the trade deficit is expected to gradually continue insofar as COVID-19 infections remain under control,” Rasid said.
Current account balance
While JP Morgan expects the current account balance to narrow to 1.1 percent of gross domestic product this year from 3.6 percent in 2020, it remains cautious on the outlook, citing risks from the slow vaccine rollout and the potential escalation in COVID-19 cases in the coming months.
In a separate research note, ING Philippines economist Nicholas Mapa said a strong dollar theme coupled with the wider-than-expected trade gap might have helped push the peso past the 50 psychological handle on Friday.
The peso has so far depreciated by 1.94 percent this month.
The last time the peso traded at the 50 level against the dollar was in June 2020, at the height of COVID-19 uncertainties.
Mapa said BSP Governor Benjamin Diokno appeared unfazed by the recent depreciation of the peso, indicating that the currency remained driven by supply and demand conditions.
“This suggests that the BSP will likely withhold resorting to costly policy rate hikes to help stem the depreciation trend; however, we see the BSP changing its tune should the weakness go on for a considerable period of time,” Mapa said.
“In the near term, we expect the BSP to stick to its accommodative stance given that the economic recovery is still in its nascent stages.”
Meanwhile, ING expects continued pressure on the peso in the near term, noting the acceleration in import demand especially if exports would remain constrained by shipping bottlenecks. INQ
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