‘Inaction is action’ may be BSP’s monetary policy for 2021, says economist

MANILA, Philippines — The central bank will likely keep its key interest rate unchanged when its Monetary Board convenes on Thursday with the regulator finding itself lodged between the opposing demands of fighting rising inflation and restarting the country’s economic growth.

As such, the Bangko Sentral ng Pilipinas (BSP) may even end up leaving its overnight borrowing rate — which banks use as a guide for pricing their own loans — untouched at present levels for the rest of 2021.

“Inaction is action,” said ING Bank Manila senior analyst Nicholas Mapa of the monetary regulator’s most likely move while being “caught between a rock and a hard place” due to the unexpectedly high January inflation rate and the worst economic contraction in the Philippines’ postwar last year.

“Gov. [Benjamin] Diokno quickly moved to snuff out any expectations for a rate hike, citing the sources of inflation as his reason for the likely pause,” the economist said. “As such, a rate hike at this point would do little to make pork or chicken meat cheaper or the price of global crude oil fall.”

At the same time, he pointed out that a rate increase to fight off the accelerating price increases of basic goods and services, “with the economy still mired neck-deep in recession, would derail the recovery efforts both by signaling a reversal in policy stance and make it even more difficult for cash strapped households and firms to access much-need funding.”

The central bank chief is aware of the limits of monetary policy and, as such, “will be more circumspect in his actions to make every policy move count,” Mapa said.

Last week, the central bank reassured that the unexpected spike in January’s inflation rate, which came in above all forecasts of government policymakers and private-sector economists, was a temporary phenomenon that will not cause the annual average to exceed the official target range, according to the central bank.

It noted that last month’s consumer price index of 4.2 percent was largely caused by supply-side pressures related to the African Swine Fever outbreak that pushed local pork prices higher. Also contributing to the faster price increases were weather-related disturbances, higher global oil prices, and the base effect of having come from a low inflation rate in the same period last year.

Mapa said he expects the central bank not to repeat the mistakes of 2018 when, during a spike in rice prices, the monetary regulator “unleashed a string of moves that confounded market players, hiking policy rates but simultaneously releasing tons of liquidity into financial markets.”

“The series of moves did little to quell inflation nor allay concerns about accelerating prices gains, culminating in a severe breach of the inflation target and, just as detrimental, a broadside to bank lending momentum that impaired capital formation for months to come,” he said.

“At this juncture keeping policy rates unchanged would allow BSP to provide the economy support for the recovery while at the same time safeguard against any budding demand side pressure, which appears to be negligible at the moment,” the ING economist said.