By Luz Wendy T. Noble, Reporter

THE Bangko Sentral ng Pilipinas (BSP) left its key policy rate at a record low for a sixth consecutive meeting on Thursday, even as BSP Governor Benjamin E. Diokno warned the renewed lockdown poses a risk to economic recovery.

The overnight reverse repurchase facility was left unchanged at 2%, as expected by all 18 analysts in a BusinessWorld poll last week.

The central bank has also retained the overnight deposit and lending rates at 1.5% and 2.5%, respectively.

“The Monetary Board observed that the reimposition of quarantine measures to arrest the recent wave of COVID-19 (coronavirus disease 2019) infections could pose a risk to the ongoing economic recovery,” Mr. Diokno said at a briefing on Thursday afternoon.

“To this end, targeted fiscal and health interventions, especially the acceleration of the government’s vaccination program, will be crucial in safeguarding public health and preventing deeper negative effects on the Philippine economy.”

High-risk areas including Metro Manila and some provinces that are experiencing a surge in COVID-19 infections are under a two-week lockdown until Aug. 20.

Despite the strict lockdown, the number of daily COVID-19 cases continues to rise. On Thursday, the Health department reported 12,439 new COVID-19 cases, bringing the total number of active cases at 87,663.

An additional 177 Delta variant cases were also reported on Thursday. Total Delta variant cases now stand at 627.

“The Monetary Board remains keen on sustaining monetary policy support for as long as necessary in order for the momentum of economic recovery to gain more traction as well as to help boost domestic demand and market confidence, especially as risk aversion continues to temper credit activity,” Mr. Diokno said.

He said the BSP is ready to adjust policy settings as needed, adding that the risks to inflation appeared balanced.

“Going forward, the BSP will remain vigilant against any emerging risks to the outlook for inflation and growth,” Mr. Diokno said.

The Philippines exited recession in the second quarter, as gross domestic product (GDP) grew by 11.8%. This brought first-half GDP growth to 3.7%, still below the 6-7% full-year government target.

However, recovery momentum was dented after second-quarter GDP declined by a seasonally adjusted 1.3% on a quarter-on-quarter basis, following a 0.7% growth in the first quarter.

Banks also continued to be risk-averse, with bank lending declining for a seventh straight month in June.

Meanwhile, the central bank upwardly revised the inflation outlook for the year to 4.1% from 4%, BSP Deputy Governor Francisco G. Dakila, Jr. said.

The new estimate exceeds the central bank’s 2-4% target range.

For 2022 and 2023, the BSP expects inflation to average 3.1%, also slightly higher than its previous 3% estimate for both years.

“Factors that led to the revision include higher global crude and non-oil prices, weakening of the peso, as well as concerns about the speed of arrival of imported pork. This is also taking into account the latest inflation outturn, specifically in June and July that came after the previous policy meeting,” Mr. Dakila said.

The peso has been trading at the P50 per dollar level in recent weeks. It closed at P50.39-a-dollar on Thursday, 4.9% weaker than its P48.023 close on the last trading day of 2020.

Mr. Dakila said the weaker peso is consistent with the “broad dollar strength” against other currencies as investors fled to safe havens amid worries over the Delta variant. He said this risk-off sentiment was also caused by the perceived shift of the US Federal Reserve to a more hawkish tone.

At the same time, the consumer price index (CPI) in July rose by 4%, marking the first time that headline inflation was within the BSP’s 2-4% target since December 2020. July inflation eased from the 4.1% in June mainly due to slower increase in the transport index. However, inflation in the first seven months of the year still exceeded the target range at 4.4%.

Mr. Dakila said the expectation for a faster CPI increase is mainly caused by supply issues as “demand conditions are not really driving inflation.”

“When we look at the distribution of the CPI items, in terms of how fast the prices of these items are increasing, more than half or 53.2% of the total items are actually having inflation rates below 2%, below the lower bound of inflation target. So again, that’s an indication that demand conditions are at the moment muted,” he said.

The BSP’s higher inflation outlook for 2021 and the succeeding two years kills any chance of a surprise rate cut, Pantheon Macroeconomics Senior Economist Miguel Chanco said in a note.

“We maintain that a reacceleration in inflation in the remainder of this year is on the cards, as the country continues to import high amid rising global food inflation, and as the lagged impact of the recovery in global oil prices filters through to utility and transport costs,” he said, noting the peso’s weakness will also strengthen the case for the BSP to retain the policy rates at record lows.

Meanwhile, Alex Holmes, Asia economist at Capital Economics, expect more rate cuts ahead as it sees the central bank supporting recovery that is hindered by a slow-paced vaccination.

Data from the Johns Hopkins University showed only 10.74% or 11.614 million of the population have been fully vaccinated. The government aims to vaccinate 70 million adult Filipinos by yearend to achieve herd immunity that could be the key to safely reopen the economy.

“The virus is set to remain a major headwind to the economy for some time and the unemployment rate — which the central bank has indicated it is keeping a close eye on — is likely to shoot up once again,” Mr. Holmes said in a note, adding a rate cut may be on the table in the next policy review.

The Monetary Board has three more policy meetings this year. The next one is set on Sept. 23.