BSP not in a hurry to raise rates as economy still needs help, say think tanks

Economic think tanks expect the Bangko Sentral ng Pilipinas’ (BSP) “patience” in keeping the policy rate at the current record-low 2 percent to be stretched up to this year’s end, to support economic recovery while COVID-19 risks linger.

Alongside expectations that headline inflation will ease to the 3-percent level early this year, “we expect the BSP to be patient in normalizing policy settings, only hiking the policy rate in the fourth quarter of 2022,” Goldman Sachs Economics Research said in a Jan. 5 report.

Following the within-target, 3.6 percent year-on-year inflation rate posted in December 2021, Goldman Sachs projected early 2022 price hikes to benefit from last year’s high-base effects. To recall, food prices, especially of pork, soared last year due to limited supply amid the African swine fever outbreak.

However, Goldman Sachs acknowledged that the onslaught of super-typhoon “Odette” last month may pose upside risks to its inflation forecast “if recent typhoon-linked disruptions push food prices significantly higher.” The Philippine Statistics Authority’s December 2021 consumer price index report showed not much impact of Odette just yet.

Still, the investment banking giant expects Philippine monetary authorities to keep the policy stance steady during the near term “with headline inflation back within the BSP’s inflation target band of 2-4 percent and a nascent growth recovery challenged by the emergence of the Omicron variant,” citing the stricter alert level 3 movement restrictions imposed by the government in Metro Manila and surrounding provinces this month amid the ongoing daily spikes in COVID-19 cases.

Goldman Sachs had correctly predicted end-2021 inflation to settle at 4.5 percent, above the BSP’s 2-4 percent target range of manageable price increases conducive to economic growth. It had forecasted the rate of increase in prices of basic commodities in the Philippines to fall to 3.2 percent this year.

In a separate report, Pantheon Macroeconomics senior Asia economist Miguel Chanco said that as far as headline inflation was concerned, “another leg down is likely in the current month, but January should mark the trough, particularly with short-term trends at the margin firming up.”

Chanco conceded that “it now looks like the worst of the Philippines’ inflation woes are behind it,” such that he lowered his forecast for 2022 to 3.2 percent from 3.6 percent previously.

Chanco forecasted that the BSP “will be one of the few [central banks] in the region that is likely to stand pat this year, as growth is likely to disappoint in the face of election-related headwinds, lingering COVID-19 risks, and the rebuilding of household savings lost since 2020.” The UK-based think tank had projected gross domestic product to grow by 4.5 percent in 2022, way below the government’s 7-9 percent target.