Low BSP rates to stay— for now, say economists

Economists expect the Bangko Sentral ng Pilipinas (BSP) to keep the record-low policy rate at 2 percent up to next year despite upside inflation risks lingering from global supply chain bottlenecks and elevated oil prices.

“With headline inflation returning to the BSP’s inflation target band of 2-4 percent in our baseline forecasts and the economy only beginning the recovery process from the COVID-19 shock as virus restrictions are progressively eased over the coming year, we expect the BSP to be patient in normalizing policy settings, keeping the policy rate on hold until late 2022,” Goldman Sachs Economics Research said in a report.

On top of maintaining key rates, the BSP last Thursday said it also retained its 2022 inflation forecast of 3.3 percent, within the target range. Its 2021 forecast was slightly cut to 4.3 percent from 4.4 percent previously, but still above-target.

Economic recovery

Goldman Sachs noted that “the meeting statement and policymaker comments at the postmeeting press conference now characterize inflation risks in 2022 as having ‘shifted towards the upside’ due to potential impacts from higher commodity prices, transport fare hikes and food supply constraints amid weather-related disturbances.”

Pantheon Macroeconomics senior Asia economist Miguel Chanco said the BSP “will be part of the group of central banks in emerging Asia that will remain on the sidelines in 2022” to support economic recovery from the pandemic-induced slump.

“COVID-19 is unlikely to be a concern for the Philippines in the coming 12 months, as we reckon that 85 percent of the country is either double-jabbed or has immunity from prior infection. But economic growth is likely to disappoint. Indeed, we expect GDP (gross domestic product) growth to slow to 4.5 percent [in 2022] from 5.5 percent this year, partly as election-related uncertainties put temporary breaks on investment, and as government spending comes to a brief standstill. More broadly, private consumption probably will be subdued, as households continue to rebuild the substantial savings lost over the last 18 months, a process that was set back significantly by the Delta wave,” Chanco said.

His 2021 growth forecast was above the government’s 4-5 percent target, but his 2022 projection fell below the 7-9 percent goal.

Capital Economics Asia economist Alex Holmes said that “although growth for the year will probably now eclipse the government’s earlier estimate of 4-5 percent, the economy will still enter 2022 with huge amounts of spare capacity.”

Monetary policy

“With the economy likely to still be in recovery mode throughout next year and inflation set to settle comfortably within the Bank’s target range, we see little reason for the BSP to begin tightening in 2022. The [central] bank’s numerous assurances that it is in no rush to hike add weight to that view,” Holmes said.

“Continuation of accommodative monetary policy is also a major pillar for the country’s economic recovery program from COVID-19, as this helps in keeping short-term borrowing costs relatively lower that spurs greater demand for loans/credit that, in turn, helps in stimulating more investments as well as the creation of more jobs and generates more business activities,” Rizal Commercial Banking Corp. chief economist Michael Ricafort said.

“Accommodative monetary policy would still do more of the heavy lifting for the economy, in view of the lack of funds for any additional stimulus measures, in view of the constraints presented by the wider budget deficit and overall debt levels in recent months due to the COVID-19 pandemic,” Ricafort added.

For his part, ING Philippines senior economist Nicholas Mapa said “slightly slower inflation gives the central bank some breathing room to retain accommodation for now; however, a surprise pickup in economic growth opens the door for possible adjustments down the road.”

“We expect the BSP to retain its accommodative stance to close out the year, but we’ve pencilled in a possible rate hike by the central bank by the second quarter of 2022. By then the Philippine economy would have logged four straight quarters of GDP growth, which may be enough to convince [BSP] Governor [Benjamin] Diokno to finally reverse his current accommodative stance,” Mapa said.

As for Singapore-based United Overseas Bank (UOB), it said “we continue to expect a steady RRP (overnight reverse repurchase) rate of 2 percent until mid-2022.”

“Thereafter, we anticipate a 25-basis points rate hike in the third quarter of 2022 that will bring the RRP rate to 2.25 percent by end-2022. This is primarily premised on signs of a solid growth recovery with diminishing pandemic-related risks and stronger protection from higher vaccination rate by then; the build up of demand price pressures in tandem with the improvement in labor market conditions in the second half of 2022; and changes in global monetary policy next year,” UOB senior economist Julia Goh and economist Loke Siew Ting said.