BSP maintains key rate at record low

THE BANGKO SENTRAL ng Pilipinas (BSP) held its key interest rate at a record low for a fourth straight meeting on Wednesday, as it continues to support the economy’s recovery from the pandemic.

The Monetary Board maintained the overnight reverse repurchase rate at a historic low of 2%, in line with expectations of 15 out of 17 analysts in a BusinessWorld poll last week. Both the lending and deposit rates were also kept at 2.5% and 1.5%, respectively.

“On balance, the expected path of inflation and downside risks to domestic economic growth warrant keeping monetary policy settings steady. The Monetary Board believes that sustained support for domestic demand remains a priority for monetary policy, especially as risk aversion continues to hamper credit activity despite ample liquidity in the financial system,” BSP Governor Benjamin E. Diokno said on Wednesday.

The BSP’s decision to keep rates steady comes a day after release of disappointing first-quarter gross domestic product (GDP) data. For the first three months of 2021, GDP shrank by an annual 4.2%, keeping the economy in a recession for a fifth consecutive quarter.

“At the same time, the Monetary Board expects the domestic economy to continue to recover in the coming months, aided by the Government’s targeted fiscal interventions and the sustained rollout of its vaccination program. Improved prospects overseas should also support the outlook for domestic economic activity,” Mr. Diokno said.

However, he warned the recent surge in coronavirus disease 2019 (COVID-19) infections and renewed restriction measures are hurting market confidence and poses risks to domestic demand.

“Looking ahead, the BSP affirms that maintaining an accommodative stance should quicken the economy’s transition toward a sustainable recovery,” Mr. Diokno added.

BSP Deputy Governor Francisco G. Dakila, Jr. said the central bank will keep a close eye on data to assess when to approach normalization of policy as economic conditions improve.

“It is very important to not do the exit process prematurely especially when economic growth can still be quite subject to uncertainty. We will be waiting for further data and looking at firmer signs that economic growth is strong and sustainable,” Mr. Dakila said.

“Monetary policy works with a lag, and that lag tends to be longer at times of uncertainties like in current episodes.”

Bank lending has been tepid in the previous months and has declined for the fourth straight month in March by 4.5%. This, as banks remained risk-averse while borrowers continued to have debt servicing difficulties.

“We expect bank lending to recover by the third quarter as base effects from last year and with demand for credit returning as the economic recovery gets under way,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said.

TAMER INFLATION SEEN
Mr. Diokno said the BSP is now seeing a tamer, within-target inflation this year due to the impact of non-monetary interventions. Malacañang issued Executive Order (EO) 128 which reduced tariffs on pork imports and EO 133 which increased the volume of pork imports, as part of efforts to stabilize pork supply as the domestic hog industry continues to struggle with the African Swine Fever outbreak.

“Latest inflation forecasts indicate that inflation is likely to settle within the target range in 2021 and 2022… The risks to the inflation outlook are also broadly balanced. The Monetary Board emphasizes that the timely implementation of approved non-monetary measures will be crucial in mitigating further supply-side pressures on meat prices and inflation,” he said.

The BSP lowered its inflation outlook this year to 3.9%, from a previous estimate of 4.2%. On the other hand, the forecast for 2022 was raised to 3%, from 2.8% previously. This will put inflation back within the BSP’s 2-4% annual target range.

“Downward revision [for 2021] can be attributed to the following factors: impact of lower tariffs on the price of pork, lower-than-expected inflation that we saw both for March and April, and the impact of the first-quarter GDP outturn and the implication of that on economic activity for the first half of the year, as well as the continued appreciation of the peso,” Mr. Dakila said.

Upside risks to the inflation outlook include higher global oil prices and non-oil prices, he added.

Inflation is likely to remain “slightly elevated” in the second quarter but is expected to decelerate by the second half of the year due to the measures done by the National Government to resolve the supply problem on meat products, BSP Department of Economic Research Senior Director Zeno R. Abenoja said.

For 2022, Mr. Dakila said the higher inflation expectation can be attributed to the “impact of increases in crude oil prices as well as faster prospects for domestic economic growth.”

“Right now, based on futures prices and assessments of international organizations, we think the Dubai crude oil prices could average a little over $63 in 2021 (from $61.37 per barrel previously). For 2022, it will be about $61 per barrel (from $57.79),” Mr. Abenoja said.

Alex Holmes, an economist from Capital Economics, said he expects the central bank to cut rates anew when inflation settles.

“Provided inflation does begin to fall back later in the year, then rate cuts are likely in the second half of the year,” Mr. Holmes said. — Luz Wendy T. Noble