THINK TANK Fitch Solutions said they see the Bangko Sentral ng Pilipinas (BSP) keeping benchmark interest rates at their current record lows this year to drive economic recovery, and may have to wait a bit longer to unwind its easy policy if bank lending continues to be weak.

“We do not see the BSP easing further despite the rising risks to the economic recovery. Indeed, we maintain our forecast for the key policy rate to stand at 2% by end-2021 and see downside risks to our outlook for three 25 bps (basis points) rate hikes in 2022, given the Philippines’ continued struggles with managing the COVID-19 pandemic,” Fitch Solutions said in a note on Thursday.

“We highlight weak credit growth as a signal that monetary policy may need to remain accommodative over an extended period time,” it noted.

The BSP kept benchmark rates steady for a fourth straight meeting on Wednesday as it continues to support the economy’s recovery from the pandemic.

The Monetary Board maintained the overnight reverse repurchase rate at a historic low of 2%, in line with expectations of 15 out of 17 analysts in a BusinessWorld poll last week. Both the lending and deposit rates were also kept at 2.5% and 1.5%, respectively.

The BSP’s decision came a day after release of disappointing first-quarter gross domestic product (GDP) data. For the first three months of 2021, GDP shrank by an annual 4.2%, keeping the economy in a recession for a fifth consecutive quarter.

Still, the central bank lowered its inflation outlook this year to 3.9%, from a previous estimate of 4.2%. On the other hand, the forecast for 2022 was raised to 3%, from 2.8% previously. This will put inflation, which averaged at 4.5% in the first four months of 2021, back within the BSP’s 2-4% annual target range.

Meanwhile, credit by big banks continued to drop for the third consecutive month in February as both lenders and borrowers remained risk averse due to the ongoing coronavirus crisis that has also caused liquidity growth to slow.

Preliminary data from the BSP showed outstanding loans by big banks declined by 4.5% to P8.979 trillion in March from P9.4 trillion a year earlier as credit granted for production and household consumption contracted. This was worse than the 2.7% decline seen in February.

“The combination of the easing inflationary pressures and the economic downside risks spurred the Monetary Board to keep conditions accommodative,” Fitch Solutions said in its note.

“We will be watching the Philippines’ COVID-19 containment efforts and vaccination program. If the country continues to struggle with the outbreak we could revise our economic growth outlook lower and with it, our outlook for policy hikes in 2022,” it said. “In particular, if the weak credit data continues through 2021, monetary policy conditions may have to be eased further.”

The think tank expects the economy to grow by 5.3% this year versus last year’s 9.6% slump.

Meanwhile, it expects headline inflation to average at 4% this year on expectations that prices will subside over the coming months. For next year, inflation could ease to 3.4% as demand picks up and the global economy reopens further.

“[I]f the Philippines is still struggling to contain COVID-19 outbreaks in 2022, the recovery in domestic demand may take longer and rising demand-side pressures may not materialize,” it added. — BML