BSP likely to hold rates steady — poll

By Luz Wendy T. Noble, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) is widely expected to keep rates steady on Thursday to continue supporting the Philippine economy’s recovery.

Twenty economists in a BusinessWorld poll held last week unanimously forecast that the Monetary Board would maintain the overnight reverse repurchase rate at a historic low of 2% during its Nov. 18 meeting.

“The BSP may continue to be patient and continue its accommodative monetary policy stance given the current domestic, external and financial developments,” BSP Governor Benjamin E. Diokno told reporters via Viber on Sunday.

Despite the stronger-than-expected gross domestic product (GDP) growth data in the third quarter, analysts think there is still a need to keep an accommodative policy stance because recovery has yet to firm up. 

“I think the BSP will keep policy rates unchanged. The economy is still weak and the recovery has to have strong legs [at least two more quarters of robust growth] to run before the BSP revises its rates,” said Victor A. Abola, an economist at the University of Asia and the Pacific.

ANZ Research Chief Economist for Southeast Asia Sanjay Mathur said it is not yet clear whether the third-quarter growth could be sustained.

Data from the Philippine Statistics Authority showed GDP rose by 7.1% year on year in July to September, a turnaround from the 11.6% decline a year earlier but slower than the 12% annual expansion in the second quarter. A strict lockdown was implemented in Metro Manila for two weeks in August to curb a Delta-driven surge in coronavirus disease 2019 (COVID-19) infections. On a quarter-on-quarter basis, GDP grew by 3.8%.

Economic managers are optimistic that the 4-5% growth target for 2021 is attainable as GDP expanded by 4.9% in the first nine months.

“The GDP prospects appear bright…These latest forecasts suggest that the country’s real output will revert to its pre-pandemic level by the third quarter of 2022, if not sooner,” BSP Governor Benjamin E. Diokno said in a Viber message to reporters on Sunday.

Mr. Diokno may likely be able to confirm whether economic growth is truly on the mend once the base effects from 2020 fade, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said. The economy contracted by a record 9.6% in 2020 amid long and strict lockdowns.

“We expect BSP to consider tightening sometime in the first half of 2022, after a considerable number of positive GDP data points give palpable evidence that the recovery is sustainable and as we inch closer to 2019 levels of GDP,” he said.

Ensuring sustained accommodative policy would help to solidify recovery as lower financing costs spur greater demand for credit, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

“This [credit] is in turn expected to help in stimulating more investments and job creation,” Mr. Ricafort said.

Capital formation, which is boosted by lending, rose by 22% in the third quarter, a reversal of the 39.5% contraction a year earlier but slower than the 80.3% rise in April to June.

Bank lending posted a second straight month of growth in September, expanding by 2.7% year on year.

Bank lending started to expand in August after eight straight months of contraction since December, with analysts saying it reflected the lag in monetary policy easing that began last year. The BSP slashed rates by 200 basis points in 2020 to support the pandemic-stricken economy.

While still above target, inflation has eased for two straight months. This strengthens the case for the BSP to maintain its policy settings, analysts said.

“The inflation rate remains elevated so I think the BSP will retain its policy rate at its next meeting,” said Mitzie Irene P. Conchada, an economist from the De La Salle University.

ANZ’s Mr. Mathur said inflation continues to be driven by supply issues but appears to be easing.

The consumer price index rose by 4.6% in October, easing from 4.8% in September as food prices increased slower.

This brought inflation year to date to 4.5%, which is still above the 4.4% forecast by the BSP for 2021 as well as the 2-4% target. Mr. Diokno said inflation could even be at a slower 4.3% this year given recent developments.

“With inflation likely to be within target next year, we continue to expect the BSP to be in no hurry to raise its policy rate before the fourth quarter of 2022, and ensure ample liquidity support for the nascent economic recovery,” said Nalin Chutchotitham, Citigroup, Inc. economist for the Philippines.

Mr. Diokno earlier said prematurely hiking interest rates could pose more harm to economic recovery than increasing it too late.

The Monetary Board kept interest rates unchanged at its September review, even as it raised its inflation expectation due to low supply. Officials said monetary policy support was needed to boost domestic demand and market confidence.

After Thursday’s meeting, the BSP will have its last policy review this year on Dec. 16.