THE BANGKO SENTRAL ng Pilipinas (BSP) is likely to keep its policy settings untouched in 2021 to support recovery, analysts said, with a rate hike expected to happen if inflation risks persist.

“The BSP will look to the slow domestic recovery as a reason to keep monetary policy accommodative, particularly with uncertainty around the pandemic still high,” Fitch Solutions Country Risk & Industry said in a note.

The central bank maintained benchmark rates at record lows last week as it supports an economy whose recovery is at risk from a renewed surge in coronavirus infections.

The Monetary Board kept the overnight reverse repurchase or policy rate at an all-time low of 2% for a third consecutive meeting. Rates for the overnight lending and deposit facilities were also maintained at 2.5% and 1.5%, respectively.

The central bank slashed rates by 200 basis points last year. The Monetary Board has six more policy-setting meetings this year, with the next one set on May 13.

Fitch Solutions said the renewed lockdown and stricter restriction measures in Metro Manila and some provinces strengthen the case for the BSP to hold its policy settings for the whole year.

“We expect this to spur the BSP to keep monetary conditions loose as domestic activity remains below pre-pandemic levels and spare capacity is large. Compounding this is the lack of credit growth despite loose monetary conditions,” it said.

Outstanding loans by big banks fell for the second straight month by 2.4% in March as lenders remained risk-averse due to the pandemic.

Separately, Nomura Global Markets Research also projects a base case scenario of a pause for the whole of 2021.

“We continue to expect the policy rate to remain unchanged at 2% this year, but still see a rising risk of rate hikes if BSP’s expectation of inflation moderating by the fourth quarter does not materialize,” Nomura Global Markets Research analysts Euben Paracuelles and Rangga Cipta said in a note on Friday.

“While we think BSP sounded more hawkish [on Thursday], it is also unlikely to be signaling that rate hikes are imminent as it continues to see limited signs of second-round effects of inflation,” the analysts said.

The central bank upwardly revised its inflation forecast for the year to 4.2% (from 4%), above the 2-4% target for 2021. Meanwhile, the outlook for 2022 was also raised to 2.8% from 2.7% previously.

Inflation reached 4.7% in February due to higher food prices caused by typhoons and the African Swine Fever that tightened supply. This was the fastest print since the 5.1% in December 2018.

BSP officials have said they remain watchful for signs of broader-based inflation, but said supply-side factors would not warrant an “earlier-than-planned” exit from easy monetary policy. — L.W.T. Noble

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