Philippines Holds Rates as Price Pressures Ease, GDP Disappoints

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The Philippine central bank held its key interest rate at a record low Wednesday after a disappointing economic performance last quarter and as price pressures cool.

Bangko Sentral ng Pilipinas left the benchmark rate at 2% for a fourth straight meeting, as predicted by 20 of 21 analysts in a Bloomberg survey. One forecast a 25 basis point cut.

The bank also lowered its inflation forecast for 2021 to 3.9% -- down from a previous estimate of 4.2% -- while raising next year’s outlook to 3%, compared to 2.8% previously. That would put inflation back inside the bank’s 2%-4% target range.

The central bank has been focused on supporting the shaky recovery, which has taken a hit from recent curbs imposed to contain a new surge in Covid-19 infections. Gross domestic product contracted by a larger-than-expected 4.2% in the first quarter, putting the Philippines on track to record one of the weakest rebounds in Southeast Asia this year.

“Slowing inflation should give BSP leeway to keep policy rates unchanged for the rest of the year to help support the economic recovery,” said Nicholas Mapa, an economist with ING Groep NV in Manila. With first-quarter growth data disappointing, “the economy is clearly in need of more support and not less.”

Philippines Holds Rates as Price Pressures Ease, GDP Disappoints

One-month peso non-deliverable forwards rose 0.1% to 47.96 after the decision.

“The Monetary Board believes that sustained support for domestic demand remains a priority for monetary policy, especially as risk aversion continues to hamper credit activity despite ample liquidity in the financial system,” Governor Benjamin Diokno said. “The BSP remains committed to deploying its full range of instruments as appropriate in support of its price and financial stability mandates.”

What Bloomberg Economics Says...

“With growth headwinds from the pandemic still strong and inflation still above-target, we continue to see a prolonged dovish pause from the Philippine central bank. Further rate cuts probably won’t be forthcoming -- even with the downside surprise in 1Q GDP and an expected deceleration in inflation later this year.”

-- Justin Jimenez, Asia economist

With policy makers looking past inflation that has been running above-target, any slowdown in the pace of price gains could potentially open the door to more easing. The consumer price index rose 4.5% in April, the same level as March and below the median estimate of 4.7% in a Bloomberg survey of economists.

Other points from the rates briefing:

  • Risks to the inflation outlook are broadly balanced, with the domestic economy expected to recover in coming months but a surge in Covid-19 infections and containment measures creating downward pressure
  • Keeping policy accommodative should help quicken the economic recovery

The central bank “sounded more neutral today and more comfortable with the inflation outlook” than at its previous meeting, said Euben Paracuelles, chief Asean economist at Nomura Holdings Inc. in Singapore. “This is likely signaling only that policy settings will remain unchanged for a while, in line with our forecast the policy rate stays at 2% this year, as headline inflation will still be above the target in coming months.”

©2021 Bloomberg L.P.

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