Philippines Holds Rates as Virus Keeps Recovery ‘Tentative’

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The Philippines’ central bank held its key interest rate steady for a fifth straight meeting, pledging to keep policy loose as long as necessary to support a recovery it sees as “tentative.”

Bangko Sentral ng Pilipinas left the benchmark rate at 2% Thursday, as predicted by all 20 analysts in a Bloomberg survey. The bank said it now sees inflation averaging at the top of its target range this year before moderating in 2022.

“Economic activity has improved in recent weeks, but the overall momentum of the economic recovery remains tentative as the threat of Covid-19 infections continues,” Governor Benjamin Diokno said in a briefing in Manila. The central bank “affirms its support to the economy for as long as necessary to ensure its strong and sustainable recovery.”

Philippines Holds Rates as Virus Keeps Recovery ‘Tentative’

Six-month peso non-deliverable forwards rose 0.2% to 49.27 per dollar after the decision.

Inflation remains above the bank’s 2%-4% target but has steadied in recent months, leaving the bank room to maintain support for a flagging economy. Analysts have slashed the country’s growth outlook by the most among Asia’s major economies, forecasting the Philippines to be among the slowest to recover from the pandemic.

What Bloomberg Economics Says...

“With inflation pressures moderating and the growth outlook still subdued, we expect BSP’s pause to extend through this year and most of next. Our baseline scenario remains for BSP to begin raising rates in 4Q 2022.”

-- Justin Jimenez, Asia economist

Click here to read the full note

The central bank on Thursday raised its 2021 inflation forecast to 4% -- from 3.9% at its last meeting -- due to higher oil prices, saying price increases should moderate to 3% in 2022 and 2023.

Fiscal Support

Some analysts see the pause on the interest-rate front extending to next year.

The central bank “will likely hold off on any moves for the balance of the year to bolster the economic recovery,” ING Groep NV senior economist Nicholas Mapa said. “The threat of a surge in Covid-19 infection weighs on growth prospects and the economy will need all the help it can get.”

Deputy Governor Francis Dakila said supporting the recovery is a key aim of the central bank’s policy, noting “the space is there” to keep policy loose as long as needed. He also said “implementation of additional fiscal packages” would help boost demand.

“The economy could certainly do with more support,” said Capital Economics Ltd. Asia economist Alex Holmes, who estimates Philippine gross domestic product remains about 10% below its pre-pandemic level. “Provided inflation falls back as we expect, then rate cuts are likely in the second half of the year.”

©2021 Bloomberg L.P.

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