Philippines Seen Holding Rates Amid Slump: Decision Guide

(Bloomberg) -- The Philippine central bank is set to leave its key interest rate unchanged for a second straight meeting, allowing previous stimulus steps to work their way through an economy in recession.

Bangko Sentral ng Pilipinas will keep the benchmark rate at 2.25% Thursday, according to all but one of the 20 economists surveyed by Bloomberg. At its last rate meeting in August, the central bank embarked on a “prudent pause” following 175 basis points of reductions this year and other liquidity measures.

Policy makers will “allow more time for previous measures to feed through to the economy and for BSP to assess their effects,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore.

That prior easing has yet to trickle down to the real economy, with consumer confidence falling to the weakest level on record in the third quarter. With private consumption making up more than 70% of the Philippine economy, the weak sentiment “says a lot about the outlook” for the recovery, and could prompt policy makers to provide “dovish forward guidance,” Paracuelles said.

The peso has risen more than 4.5% this year, beating all its peers in Asia. The currency climbed to its strongest level in almost four years in September.

Here’s what to watch out for in Thursday’s decision:

Policy Space

While consumer-price increases remain below the midpoint of the BSP’s 2%-4% target, the inflation-adjusted interest rate is already below zero. Analysts are watching for signals about the bank’s ability and willingness to provide further monetary support.

“BSP still has the monetary buffer to perform rate cuts, and the market is looking out for further hints on that front,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. in Singapore.

With the central bank doing much of the heavy lifting to revive the Philippine economy amid limited fiscal stimulus, some analysts contend the BSP has reached the end of its rate-cutting cycle.

“Rates are low enough,” said Trinh Nguyen, economist at Natixis SA in Hong Kong. The recession was due to virus-containment measures rather than money-supply issues, and policy makers “will maintain rates to leave space for fiscal policy to act,” she said.

Deficit Financing

Governor Benjamin Diokno said recently the bank is ready to lend more to the government to help counter the economic blow from the pandemic, and on Wednesday said the government has asked for 540 billion pesos ($11 billion) in fresh budget support. Analysts will be watching for clues on the BSP’s willingness to do that and also for any indications on the size of the central bank’s bond-buying activity in the secondary market.

Growth View

Policy makers have said the second quarter marked the economy’s low point, but any comments on how long the recession will last could shed light on future monetary or fiscal policies.

Output will shrink in the third quarter compared to a year ago, Economic Planning Undersecretary Rosemarie Edillon said this week, citing weak sentiment, high unemployment and subdued manufacturing.

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