Philippines Holds Rates as Recovery Concerns Trump Inflation

(Bloomberg) -- The Philippines’ central bank held its key interest rate at a record low for a third straight meeting, voicing increasing concern about rising prices but saying they’re not yet a reason to tighten policy.

Bangko Sentral ng Pilipinas left the benchmark rate at 2% Thursday, as predicted by all 23 analysts in a Bloomberg survey. With inflation expected to breach the upper limit of the central bank’s 2%-4% target this year, the bank said it’s vigilant for any evidence that supply bottlenecks are sparking wider price pressures.

“Looking ahead, the BSP will remain watchful for any signs of inflation becoming broader-based,” Governor Benjamin Diokno said. The bank “is prepared to take immediate measures as appropriate to ensure that the monetary policy stance continues to support the BSP’s price and financial stability objectives.”

Trading in the peso and the local stock market had closed before the announcement. The six-month contract for peso non-deliverable forwards was up 0.2% to 49.25 as of 5:21 p.m.

The central bank is weighing the risk of tightening policy too early with the economy still mired in recession. The Philippines was one of the economies hardest hit by the pandemic in Asia, and -- with new virus cases still at record highs -- its recovery lags its peers.

What Bloomberg Economics Says:

“With BSP continuing to signal that it sees the inflation environment as manageable and the upswing in price pressures to be transitory, we expect its focus will remain on keeping policy accommodative to support the recovery.”

-- Justin Jimenez, Asia economist

Officials have been trying to ease concerns about price pressures since inflation reached its fastest pace in more than two years in February, saying the supply-related increases had limited spillover to the rest of the economy.

More stringent quarantine restrictions imposed this week in Manila and nearby provinces could help to ease price pressures, but may weigh on recovery prospects, said Michael Ricafort, an economist at Rizal Commercial Banking Corp. in Manila.

“Governor Diokno admits inflation will likely breach the 4% threshold but that the pandemic would exert downside pressure on prices in the near term,” said Nicholas Mapa, an economist at ING Groep NV in Manila. With price pressures expected to moderate in the second half, “we expect BSP to be on hold for the year.”

Nascent Recovery

Briefing reporters after the decision, Deputy Governor Francis Dakila said supply-side disruptions hadn’t triggered a monetary response in the past, and shouldn’t lead authorities to end their stimulus policies earlier than planned. A supportive monetary stance is still “important” with the recovery in its “nascent stage,” he said.

“The economy is in need of more support,” said Alex Holmes, Asia economist for Capital Economics. “Provided inflation does begin to fall back later in the year, then the door should be open for further easing.”

Other points from the briefing:

• This year’s forecast for average inflation was raised to 4.2%, from 4% previously
• Price increases to remain above the high end of the target band until the third quarter
• Average inflation forecast for 2022, when it’s expected to return to the target band, raised to 2.8% from 2.7%
• Timely implementation of non-monetary measures is “crucial” to anchor inflation

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