Philippines Leaves Rates Steady, Warns Curbs Limit Recovery

(Bloomberg) -- The Philippine central bank held its key interest rate steady for a sixth straight meeting, with the bank’s chief warning that lingering lockdowns to stem the spread of Covid-19 are threatening the economy’s recovery.

Bangko Sentral ng Pilipinas left the benchmark rate at 2% Thursday, as all 19 analysts in a Bloomberg survey predicted.

“The reimposition of quarantine measures to arrest the recent wave of Covid-19 infections could pose a risk to the ongoing economic recovery,” Governor Benjamin Diokno said at a briefing in Manila. “Targeted fiscal and health interventions, especially the acceleration of the government’s vaccination program, will be crucial in safeguarding public health and preventing deeper negative effects on the Philippine economy.”

Extended lockdowns to quell persistently high infections pushed the economy back into contraction in the second quarter from the previous three months. With the more contagious delta variant rampaging across Southeast Asia, analysts are slashing their outlook for Philippine economic growth, placing the nation among the region’s laggards.

Three-month peso non-deliverable forwards rose 0.1% to 50.92 per dollar after the decision.

What Bloomberg Economics Says...

“Manageable inflationary pressures and the prospect of a very gradual recovery suggest the central bank will keep policy settings loose for an extended period. But given abundant liquidity, weak credit activity and negative real rates, we see limited scope for further rate cuts.”

-- Justin Jimenez, Asia economist

To read the full note, click here

Diokno reiterated that the central bank would maintain monetary support as long as needed, and stood ready to adjust policy settings as necessary.

Inflation and economic outlook “warrant keeping monetary settings in place,” he said, adding that further logjams in the recovery could keep rates on hold longer or prompt monetary authorities to reach deeper into their policy toolkit.

Heavy Lifting

The risk of movement restrictions and vaccine delays in coming months “would support the continuation of more accommodative monetary policy to do more of the heavy lifting for the economy,” said Michael Ricafort, chief economist at Rizal Commercial Banking Corp. in Manila. The economy “still needs all the support measures that it could get, amid limited funds for any additional stimulus measures.”

Other points from the central bank’s briefing:

• Inflation this year should average 4.1%, slightly above the bank’s 2%-4% target range
• CPI is expected to return to the midpoint of the range for 2022 and 2023, averaging 3.1% in both years
• Inflation estimates have risen due to weaker peso, higher oil prices
• Recent peso weakness is partly due to hawkish tone from U.S. Federal Reserve; the central bank has an “arsenal” of tools to stabilize the currency if needed
• Risk aversion continues to temper credit activity

“The virus is set to remain a major headwind to the economy for some time and the unemployment rate – which the central bank has indicated it is keeping a close eye o– is likely to shoot up once again,” Alex Holmes, Asia economist at Capital Economics Ltd., wrote after the data. “With inflation fears receding, more rate cuts to support a beleaguered economy are likely.”

©2021 Bloomberg L.P.