Philippines Keeps Rate Steady With Inflation Concerns Rising
(Bloomberg) -- The Philippine central bank held its benchmark interest rate at a record low for a second straight meeting to boost an economy that remains in recession and with inflationary pressures starting to mount.
Bangko Sentral ng Pilipinas left the benchmark rate at 2% Thursday, as predicted by all 19 analysts in a Bloomberg survey. The bank significantly raised its inflation forecast for the year-- to 4% from the 3.2% it predicted in December -- but said supply problems driving up food costs were transitory.
“The manageable inflation outlook continues to allow the BSP to maintain an accommodative policy stance, and thus complement crucial fiscal policy measures in supporting economic activity and market confidence,” Governor Benjamin Diokno said. Still, he called for “urgent and coordinated efforts with government agencies” to address the food-supply issues.
Philippine stocks closed down 1.3% on the day before the rates decision. The peso was little changed at 48.045 per dollar.
“With inflation having already breached the BSP’s target, it’s abundantly clear that there is no more room for monetary policy easing in the Philippines,” said Joseph Incalcaterra, chief Asean economist at HSBC Holdings Plc in Hong Kong. “We expect an extended pause in monetary policy in 2021 followed by a gradual tightening cycle in 2022.”
The central bank is weighing the risk of tightening too early -- with the recession expected to last into this quarter -- while remaining on guard against price pressures. Inflation reached a two-year high in January but officials said it’s temporary and not amenable to monetary policy fixes.
“Supply-side shocks on inflation are more appropriately met by direct measures that address the causes of the supply limitations,” Deputy Governor Francis Dakila said. “They need not be met by monetary policy actions. But as in the past, the BSP would be vigilant in looking for the emergence of possible second-round effects.”
What Bloomberg Economics Says...
“The combination of quickening inflation and a fragile economic recovery mean Bangko Sentral ng Pilipinas is likely set for a prolonged pause. We still think the central bank is at the end of its rate-cut cycle -- though it will need to keep policy accommodative for an extended period to support the recovery.”
-- Justin Jimenez, Asia economist
The inflation rate should return to the 2%-4% target range in the latter part of this year, officials sad. Next year’s inflation forecast was cut to 2.7%, from 2.9% in the December estimate.
Diokno said last month that interest rates will likely remain on hold at least through the first half of this year while the economy recovers. Bank lending declined in December for the first time since 2006 while consumer sentiment remains weak, even after the central bank cut its benchmark interest rate by 200 basis points last year and boosted liquidity in the financial system.
Policy makers will next meet on rates March 25.
“Given that the country is not out of the woods yet from the Covid crisis, we think the BSP will prefer to keep policy accommodative for longer, until there are clearer signs of recovery momentum picking up,” said Angela Hsieh, an economist at Barclays Bank Plc.
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