THE CENTRAL BANK is expected to keep the policy rates at record lows before tightening by the second half of 2022, when risks to economic recovery are likely to have significantly subsided and credit activity picks up, Fitch Solutions Country Risk & Industry Research said.

“We at Fitch Solutions believe the BSP will only begin to hike once the Philippine economy is on a sustained economic recovery and domestic demand-side price pressures become stronger, which we expect in second half of 2022. Accordingly, we forecast 50 basis points of key policy rate hikes by end-2022,” it said in a note Monday.

The Monetary Board on Thursday maintained the key policy rate at 2% in order to continue providing support to an economy that has seen early signs of improvement but with growth momentum still clouded by uncertainty due to the persistence of high daily infection levels. Lending and deposit rates were also kept at 2.5% and 1.5%, respectively.

Central bank officials have said they will maintain an accommodative policy stance “for as long as necessary” to support economic recovery. They have, however, assured that the BSP will be gauge the need for policy adjustments when risks to inflation and the growth outlook emerge.

BSP Governor Benjamin E. Diokno has said that monetary authorities will only consider policy adjustments when the economy shows more signs of sustainable growth, which he expects to happen by the second half of 2022.

The government expects 6-7% economic growth this year following the record 9.6% contraction in 2020. The economy remained in recession for a fifth straight quarter with gross domestic product declining by 4.2% in the three months to March.

Fitch Solutions said it expects inflation to ease in the next quarter as a result of the measures taken to respond to the shortage of pork, which was the trigger for higher inflation in recent months.

In May, the government temporarily lowered tariffs for pork imports and raised the minimum access volume for the commodity for a year.

“Food price inflation will prove temporary as the effects of the African Swine Fever (ASF) outbreak on pork prices recedes over the coming quarters. We believe domestic demand-side price pressures will remain subdued in 2021 before rising through 2022 as the Philippine economy undertakes a more sustained recovery,” it said.

Inflation stood at 4.5% for a third straight month in May, falling from 4.7% in February but still above the 2-4% target range set by the central bank. The BSP on Thursday raised its inflation forecast for the year to 4% from 3.9% previously, factoring in the continued recovery in global oil prices and the more favorable global growth outlook.

Fitch Solutions also believes muted credit activity will also strengthen the case for the BSP to keep interest rates at record lows.

“We expect that the BSP will refrain from tightening monetary policy until loan growth returns to trend and we cannot rule out further cuts to the reserve requirement rate to bolster credit supply as economic growth accelerates in 2022,” it said.

Lending by big banks dropped 5% in April, marking the fifth straight month of declining credit activity. Loan demand remained subdued as borrowers shy away from tapping financing amid muted economic activity and expansion plans shelved. Lenders have also imposed stricter loan standards to protect against bad loans. The non-performing loan ratio was at 4.21% at the end of April. — Luz Wendy T. Noble