BSP seen keeping rates steady this year

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) will likely keep interest rates at record lows this year as rising cases of COVID-19 infections continue to impede recovery from the recession, top economists said.

ING Bank Manila senior economist Nicholas Mapa said the central bank’s Monetary Board would likely maintain the benchmark interest rate at a record low of two percent after the country’s gross domestic product (GDP) contracted by 4.2 percent in the first quarter of the year.

“With the economic recovery floundering, we expect the central bank to retain its accommodative stance, with BSP Governor Benjamin Diokno indicating that stimulus would remain for as long as the economy needed it,” Mapa said.

As part of its COVID-19 response measures, the  Monetary Board slashed interest rates by 200 basis points and brought the overnight reverse repurchase rate to an all-time low of two percent since November last year.

“Any expectations for a reversal in policy stance appear unjustified for now as the economy is clearly in need of more stimulus and not less. Second round effects have not surfaced while inflation expectations remain anchored for the time being,” Mapa said.

Mapa added the economy remains stuck in low gear as high unemployment and depressed consumer confidence weighed on overall activity with mainstay household consumption in the red again.

“The contraction in GDP coupled with the breach in the inflation target has pushed the narrative of stagflation once more.  Q2 GDP will likely revert to growth but mainly due to base effects after the plunge of 16.9 percent last year,” Mapa said.

The ING economist said inflation does appear to have leveled off, with authorities recently implementing supply-side remedies to the pork price surge such as increased importation and now the recent declaration of state of calamity.

Inflation averaged 4.5 percent in the first four months of the year after remaining steady at 4.5 percent in April as the government addresses supply-side shocks brought about by weather-related disturbances as well as the African swine fever (ASF) outbreak. It remained above the BSP’s two to four percent target.

“We expect inflation to decelerate in the coming months to hopefully restore some purchasing power to households at a time when economic prospects remain subdued,” Mapa said.

Eric Chiang, associate economist at Moody’s Analytics, said the country’s monetary policy stance would remain accommodative this year to help the economy recover from the pandemic-induced recession.

“The central bank, which will announce rates today, has kept the benchmark rate at a record low of two percent since November and is expected to keep monetary policy loose all year,” Chiang said.

Chiang said the growth outlook for the Philippines remains relatively downbeat with authorities recently tightening partial lockdown measures again in April as COVID-19 infections spiked.

“Recent lockdowns are expected to shave off momentum from the economic recovery and weigh on the services sector the most, with personal services not allowed to operate due to social distancing regulations,” Chiang added.