THE BANGKO SENTRAL ng Pilipinas (BSP) will likely be firm in keeping the policy rates at record lows through 2022, as the sluggish recovery in domestic demand may be at risk from another possible surge due to new coronavirus variants.

“Considering the BSP’s firmness in favoring economic growth in the policy equation, we are not expecting any policy rate changes through 2022. This reading is also shaped by our view of weakly recovering domestic demand that is even now threatened by the rapid spread of the Delta variant in neighboring economies,” GlobalSource Partners Country Analyst Romeo L. Bernardo said in a note sent on Saturday.

The Monetary Board kept the key policy rate at a record low of 2% last month, citing the need to support the economy as the coronavirus disease 2019 (COVID-19) remains a threat.

The Health department on Friday reported 16 additional cases with the more infectious Delta variant, of which 11 were local cases.  As of Sunday, 5,411 new COVID-19 cases were reported, bringing the number of active cases to 47,190.

“The pace of local vaccination so far as well as uncertainties regarding the efficacy of the deployed vaccines against the mutating virus leave us wondering whether any upward price pressures can be sustained by the slack in goods and labor markets,” Mr. Bernardo added.

Data from Johns Hopkins University showed 14.465 million jabs have been administered in the country. So far, only 4.288 million have completed two doses, representing 3.97% of the population.

However, Mr. Bernardo also cited several factors that may spur a policy rate hike earlier than expected, such as a sharper economic rebound and rising inflation.

“This may happen if the country avoids a resurgence in infections with its latest plan to focus vaccination in Metro Manila and other key urban areas that serve as entry points for new variants. In the event, the boost to consumer confidence coupled with potential aggressive election spending could result in a US-style run-up in inflation as pent-up demand is unleashed,” he said.

Mr. Bernardo noted a rising inflation momentum and the need to anchor inflation expectations “may force a preemptive policy rate hike.”

Headline inflation slowed to a six-month low of 4.1% in June on the back of slower increase in the transport index and the stable rise in food prices. However, it still marked the sixth month of inflation beyond the BSP’s 2-4% target.

The BSP this year expects inflation to average 4% before slowing to 3% by 2022.

“Risk-off global financial conditions, possibly triggered by the feared early US monetary tightening (whether by tapering its Treasury purchases or raising interest rate) and/or sentiment changes about the large buildup in emerging market debts, alongside less favorable opinions from credit raters and local political risks, may cause unmanageable capital outflows and lead monetary authorities to choose to tame an overshooting peso in lieu of keeping policy independence,” Mr. Bernardo said.

“In the event, even without a policy rate hike, we expect local market interest rates to take direction from global markets.”

Mr. Diokno has repeatedly said the central bank will keep an accommodative policy stance and will only withdraw support once there are “indisputable” signs of economic recovery.

The BSP has four more policy reviews this year, with the next one set on Aug. 12. — Luz Wendy T. Noble