BSP seen to keep rates steady

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to keep interest rates steady at an all-time low of two percent this year as inflation is seen breaching five percent over the next few months due to elevated oil and food prices, according to economists.

Jun Neri, lead economist at Ayala-led Bank of the Philippine Islands (BPI), said inflationary pressures would prevent the BSP’s Monetary Board from cutting its policy rate further amid the widening negative real interest rate.

“Expanding the negative spread between interest rates and inflation may harm the economy in the long run and exacerbate portfolio outflows that could drive volatility in the currency market,” Neri said.

Inflation quickened for the fifth straight month to a new two-year high of 4.7 percent in February from 4.2 percent in January due to a higher oil and food prices, particularly meat due to the African swine fever (ASF)

The inflation outturn in January and February breached the two to four percent target set by the BSP for the year.

The BSP sees inflation accelerating to 4.3 percent this year from 2.6 percent last year as inflation pressures may persists until the third quarter.

“Inflation may exceed five percent in April and remain at that level for several months before going down in the fourth quarter. Oil prices will likely remain elevated given the expected increase in demand amid the distribution of vaccines. Meanwhile, it may take the swine industry some time to address the ASF problem since supply problems usually last for many months,” Neri said.

Neri also said the possibility of a rate hike is slim right now given the economic situation, but the BSP would have no other choice especially if inflation becomes unmanageable.

HSBC economist Noelan Arbis said heightened inflation puts significant constraints on the BSP’s ability to loosen its policy rates further despite the ongoing challenges to the economy brought about by the pandemic.

“We expect the BSP to keep its policy rate on hold this year. We believe any additional rate cuts at this juncture would continue to build unwanted inflationary pressures,” Arbis said.

HSBC expects a slower recovery from the pandemic-induced recession leading to a lower gross domestic product (GDP) growth projection of 6.3 percent instead of 6.5 percent this year after a record 9.5 percent contraction last year.

It sees the BSP reversing its aggressive easing cycle that saw interest rates drop by 200 basis points to an all-time low of two percent last year in 2022 via a tightening cycle.

“We also forecast 75 basis points of rate hikes in 2022 to 2.75 percent, as long periods of negative interest rates pose inflationary and financial stability risks,” Arbis added.

Nicholas Mapa, senior economist at Dutch financial giant ING Bank, said the BSP is seen keeping interest rates on hold this year as the central bank sees the elevated inflation tapering off in the second half.

“We expect the BSP to remain sidelined for 2021 while inflation will likely remain elevated in the near term before gradually decelerating by the third quarter,” Mapa said.

Zeno Ronald Abenoja, senior director of the BSP’s Department of Economic Research, earlier said inflation would indeed remain elevated for the next few months and is now being addressed by non-monetary measures.

“When we look at the inflation dynamics, we look at the entire path or projection for inflation not only in the near term but over the next 12 to 24 months. Inflation will breach and will remain elevated for the next few months but does not necessarily mean that there could be an immediate response from the BSP,” Abenoja said.

Abenoja said monetary policy works with a lag and would not be able to influence inflation over the near term.