Think tanks see BSP maintaining key interest rates

MANILA, Philippines—Despite rising inflation risks, economic think tanks said on Monday (March 21) that they expect the Bangko Sentral ng Pilipinas (BSP) to be more patient in supporting economic recovery and keep key interest rates steady when it meets on Thursday (March 24).

In a report, Pantheon Macroeconomics senior Asia economist Miguel Chanco said that while the Monetary Board will likely maintain the policy rate at the current record-low 2 percent, the BSP’s average 2022 inflation forecast of 3.7 percent at a global oil price assumption of $83 per barrel was already passé. The Russia-Ukraine war sent fuel costs skyrocketing above $100 a barrel.

By this time, Chanco said “the energy market has calmed down to the extent that the likely pop in transport inflation in the short run should be modest, with disinflation still likely to take hold after.”

Chanco said the UK-based think tank “still doubts that the [BSP] will start to normalize” or hike rates in 2022 “as the economy remains far away from closing its COVID-19 output gap.” Pantheon Macroeconomics’ estimates showed that real gross domestic product (GDP) remained 15-percent below its pre-pandemic level.

“It’s important to remember that [BSP] Governor Benjamin Diokno set a very high bar for normalization — with both above-potential economic growth and a sustained rise in inflation above the target as preconditions,” Chanco said. Pantheon Macroeconomics expects the policy rate to be kept steady for the entire year.

In a separate report, Moody’s Analytics said that as headline inflation averaged 3 percent — within the 2 to 4 percent target band of manageable price hikes — as of end-February, the BSP had “some added breathing space to keep rates on hold because inflation has cooled from its August 2021 peak of 4.4 percent year-on-year.”

“The [BSP] is keeping a close watch on inflation expectations; Russia’s invasion of Ukraine has heightened upside risks from high global energy and food prices,” Moody’s Analytics said.

Moody’s Analytics expects rate hikes beginning the third quarter of this year given still fragile economic recovery. “Movement restrictions to slow the spread of the Omicron variant of COVID-19 have hurt domestic demand in the opening months of 2022,” Moody’s Analytics noted.

Last week, other think tanks and financial institutions like Capital Economics, Goldman Sachs Economics Research, HSBC Global Research, and Security Bank forecast the BSP to keep key rates unchanged, at least during the first half of 2022.

“We continue to expect the BSP to start tightening monetary policy in the second half of the year, with a 25-basis point (bp) hike each in the third and fourth quarters of 2022,” investment banking giant Goldman Sachs said in a March 18 report.

“We think the central bank will keep its monetary policy stance supportive of growth for now and an accelerated pace of Fed’s monetary tightening is unlikely to have any immediate bearing on the BSP’s actions,” HSBC said in another report last Friday, referring to last week’s 25-bp rate hike by the US Federal Reserve.

“Cost-push levers now are much different than in the recent past due to a global commodities contagion. Clearly, the key risk is the possibility that world commodity prices stay elevated for a prolonged period as a function of the Russia-Ukraine conflict, pressuring inflationary tendencies, and thus a pre-emptive hike may prove to be more and more prudent,” Security Bank chief economist Robert Dan Roces said last March 18.

Roces said “the likelihood of an earlier-than-the second half of 2022 policy action given that the window for monetary policy action may be narrowing with the current circumstances.”

TSB