Philippines Holds Key Rate to Spur Growth Amid Higher Prices

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

The Philippine central bank held its key interest rate steady as the economy gradually reopens from pandemic lockdowns, while signaling that consumer prices will rise faster than previously anticipated for the next few years. 

Bangko Sentral ng Pilipinas left the benchmark rate at 2% Thursday for a seventh straight meeting, as predicted by 21 of 22 analysts in a Bloomberg survey. One had expected a 25 basis point reduction.

“The outlook for recovery continues to hinge on timely measures to prevent deeper negative effects on the Philippine economy,” central bank Governor Benjamin Diokno said in a briefing. “Together with appropriate fiscal and health interventions, keeping a steady hand on the BSP’s policy levers will allow the momentum of economic recovery to gain more traction by helping boost domestic demand and market confidence.”

The country’s financial markets closed before the decision. One-month peso non-deliverable forwards barely moved on the news.

Economic managers see the country’s output returning to its pre-pandemic level only by the end of next year or early 2023. The Philippines is among Southeast Asian nations slowly easing restrictions on movement, shifting away from harsh lockdowns that have destroyed jobs and slowed any recovery. 

What Bloomberg Economics Says...

“Bangko Sentral ng Pilipinas’ decision to keep its policy rate steady despite a renewed pickup in inflation underscores that the central bank’s focus is on supporting the economy’s weak recovery. Assuming the expected slowdown in inflation materializes in the months ahead, we see BSP maintaining that support through most of 2022.”

Justin Jimenez, Asia economist

Click here to read the full note

The fact that the BSP held rates steady Thursday, “despite the very weak state of the economy, suggests further easing is unlikely,” Capital Economics Ltd. Asia economist Alex Holmes wrote in a research note. “While we are now taking out the cuts we had penciled into our forecast for this year, we think rate hikes are unlikely until 2023.”

Faster Inflation

The BSP raised its inflation forecasts Thursday, now expecting consumer price increases to average 4.4% this year, compared to the 4.1% it expected last month, even with price gains expected to cool in the fourth quarter. The bank also slightly raised its forecasts for 2022 and 2023.

The higher inflation outlook “limits any room to ease, though the bank expects inflation to moderate in the months ahead,” said Mitul Kotecha, chief emerging markets Asia & Europe strategist at TD Securities in Singapore. “Conversely, weak activity data mean that the BSP will be reluctant to tighten policy. Overall, this suggests a continuance of the status quo, with an accommodative stance.”

Inflation may exceed 5% this month before easing back to within the central bank’s goal from November, Deputy Governor Francis Dakila said at the same briefing. Price pressures mainly come from supply issues, and there’s no evidence yet of asset price inflation.

Other points from the briefing:

• Inflation is expected to average 3.3% in 2022, compared with 3.1% previously; 2023 inflation forecast raised to 3.2% versus 3.1% previously
• Potential delays in lifting virus containment measures could further dampen prospects for global growth and domestic demand, Diokno said
• A faster vaccination program and recalibration of quarantine protocols is crucial for supporting the economy: Diokno

“We believe BSP will keep policy rates untouched for as long as the Philippines is in recovery mode,” said Nicholas Mapa, a senior economist at ING Groep NV in Manila. “We forecast BSP to retain its supportive stance for the balance of 2021 and going into 2022, as the Philippines recovery remains tenuous.”

©2021 Bloomberg L.P.