ING sees BSP turning hawkish by next year

MANILA, Philippines — Dutch financial giant ING expects the Bangko Sentral ng Pilipinas (BSP) to reverse to a hawkish stance starting the second half of next year as the Philippine economy slowly recovers.

ING Bank Manila senior economist Nicholas Mapa said the BSP may raise interest rates from record lows as it takes its cue from major central banks led by the US Federal Reserve.

“We expect the BSP to finally consider tapping on the brakes by mid-2022 to prepare for the much anticipated tightening of the Fed sometime in 2023,” Mapa said.

As part of its COVID response measures, the BSP slashed interest rates by 200 basis points, lowered the reserve requirement ratio, provided recurring P540 billion provisional advances to the national government, and continued to purchase government securities in the secondary market to unleash P2.3 trillion into the financial system.

“Faced with the steepest drop in economic activity last year, monetary authorities put the pedal to the metal with a suite of policy easing. The BSP cut policy rates by 200 basis points, flooded the market with liquidity and even dabbled with bond purchases to stem market volatility,” Mapa said.

The BSP   has kept the benchmark interest rate at an all-time low of two percent for seven straight rate-setting meetings as part of an accommodative stance to help economic recovery gain more traction.

“After flooring it, the BSP opted to ease off the accelerator, pausing from its rate cut cycle for seven months and counting. The BSP has indicated it would like to wait for its policy moves to feed through to the real economy, letting the economy coast along with the accommodation provided,” Mapa said.

Latest data released by the BSP showed bank lending finally recovered, posting an increase in August after eight straight months of contraction due to uncertainties brought about by the pandemic.

“With the economy showing some encouraging signs of rebound but still remaining far from fully recovered, we can expect the BSP to provide the recovery enough juice for escape velocity,” Mapa said.

Inflation averaged 4.5 percent in the first nine months despite easing slightly to 4.8 percent in September from a 32-month high of 4.9 percent in August. The growth in the consumer price index (CPI) has stayed above the BSP’s two to four percent target since the start of the year.

ING sees inflation averaging 4.4 percent this year, before easing back to the two to four percent target at 3.5 percent next year, helped along by favorable base effects.

“The Philippines has battled inflation for most of 2021 with cost side pressures the dominant factor behind the surge as demand in the Philippines stays modest. With inflation staying close to and above target for a good number of months in 2021, one thing the Philippines can benefit from will be base effects turning favorable in the coming months,” Mapa said.