THE Bangko Sentral ng Pilipinas (BSP) kept benchmark interest rates unchanged on Thursday amid a benign inflation outlook and signs of economic recovery.

The policy-setting Monetary Board, at its fourth policy meeting for the year, kept the rates on the BSP’s overnight reverse repurchase, lending and deposit facilities at their record lows of 2.25%, 2.75% and 1.75%, respectively.

BSP Governor Benjamin E. Diokno said manageable inflation and an improvement in domestic economic activity following the relaxed lockdown measures, in contrast with tepid global conditions, backed a “prudent pause” in policy actions.

“The Monetary Board’s decision was based on its assessment that the inflation environment remains benign,” Mr. Diokno said in an online briefing on Thursday.

He said while the BSP’s latest baseline forecasts have risen slightly following a faster-than-expected July print and a recovery in global crude oil prices, “the future inflation path remains firmly within the government’s 2-4% target.”

“The Monetary Board noted that the outlook for global economic growth remained subdued and uncertain amid a resurgence in COVID-19 cases in many jurisdictions…. At the same time, the Monetary Board observed early signs of recovery in domestic economic activity with the gradual easing of lockdown restrictions, supported by ample liquidity in the financial system,” Mr. Diokno said.

Eleven out of 16 economists in a BusinessWorld poll last week expected the central bank to leave rates untouched following signals from the BSP chief that they see no reason to ease further at the moment despite the 16.5% contraction in the second-quarter gross domestic product (GDP).

Mr. Diokno had said their policy stance is likely to be on hold for the next few quarters as the BSP’s previous easing moves were preemptive.

The BSP has so far slashed benchmark rates by 175 basis points (bps) this year as it sought to support the economy due to the worsening fallout from the coronavirus pandemic.

“A prudent pause will enable the cumulative 175-basis-point reduction in the policy rate as well as other monetary and regulatory relief measures by the BSP to fully work their way through the economy, even as the National Government continues to implement interventions to bolster economic activity and protect human lives and livelihoods,” Mr. Diokno said.

FASTER INFLATION SEEN
BSP Deputy Governor Francisco G. Dakila, Jr. said in the same briefing that the inflation forecast for this year was raised to 2.6% from the 2.3% given in the June policy review.

The 2021 and 2022 forecasts were likewise hiked to 3% (from 2.6%) and 3.1% (from 3%), respectively. Still, all forecasts fall within the 2-4% target for those years.

“The balance of risks to the inflation outlook also leans toward the downside from 2020 until 2022 owing largely to potential disruptions to domestic and global economic activity amid the ongoing pandemic. Meanwhile, inflation expectations remain broadly consistent with the inflation target,” Mr. Diokno said.

Mr. Dakila said the 2020 forecast was adjusted due to faster-than-expected inflation in June and July. He added that the updated outlook for 2020 has also factored in the impact of the two-week modified enhanced community quarantine imposed in Metro Manila and nearby provinces earlier this month.

However, the economy’s contraction could offset inflationary risks this year, Mr. Dakila said. The government expects GDP to shrink by 5.5% in 2020.

Moving forward, he said policy decisions will continue to be evidence-based and will be dependent on the BSP’s latest assessment of domestic and external conditions and the inflation outlook.

“No amount of monetary easing or liquidity injection can push businesses and consumers to spend if the confidence is not there,” BSP Department of Economic Research Director Dennis D. Lapid said in the same briefing, adding the crisis is a health issue and thus, the government should respond by strengthening the country’s healthcare system as well as via fiscal stimulus.

NO EASING FOR NOW
The Monetary Board’s latest decision signals its intent to keep rates steady for the rest of the year, said ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa.

“Monetary authorities will likely hold off on further rate cuts in 2020 and look to fiscal stimulus to complement the flurry of moves from the BSP to jump-start economic growth,” Mr. Mapa said in an e-mail.

But Alex Holmes, an economist at Capital Economics, said the Monetary Board’s description of its latest policy decision as a “prudent pause” shows its easing cycle is not yet finished.

“Given the dire outlook for growth and benign inflation environment, the case for more easing is clear. We expect a 50-bp cut at the BSP’s next meeting 1^st October, which would take the policy rate to 1.75%,” Mr. Holmes said in a research note.

He added that the government’s “failure to contain the virus is holding back the recovery and may even have put it into reverse,” likewise noting that fiscal support remains insufficient.

“Even if the government eventually gets the virus under control, economic hangovers including unemployment, higher household debt and weaker corporate balance sheets will weigh heavily on the recovery. Overall, we suspect the economy will contract by around 8% this year,” Mr. Holmes said.

ANZ Research Chief Economist Sanjay Mathur and economist Kanika Bhatnagar said in a note there may be a need for further monetary easing amid the current pace of economic recovery, but said this could come in the form of further cuts to banks’ reserve requirement ratios (RRR).

“We think that the recovery is still very tentative and will need to be nurtured. Real-time activity indicators flat-lined in July and fell in August as the government had to re-impose mobility restrictions. These measures have now been partially relaxed but even so, the pace of the recovery is unlikely to be swift,” ANZ Research said.

“Overall, we are of the view that further monetary accommodation is still necessary. However, given the limited monetary transmission, future policy action could be in the form of a reduction in the RRR. A further cut of 200 bps in the rest of the year is likely, in our view.” — Luz Wendy T. Noble