Philippines Seen Settling In for Long Rate Pause: Decision Guide

The Philippine central bank is set to leave its key interest rate unchanged Thursday, in what could be an extended rate pause amid a recession and quickening inflation.

Bangko Sentral ng Pilipinas will keep the benchmark rate at 2% on Thursday for a second straight meeting, according to all 19 economists surveyed by Bloomberg. In January, Governor Benjamin Diokno signaled a “long pause” on that front, saying interest rates were likely to remain at their current level for at least two more quarters.

“I expect BSP to keep the policy rate on hold through 2021, and maintain its easy monetary policy stance,” said Chidu Narayanan, Asia economist at Standard Chartered Plc in Singapore. While persistently fast inflation may cause concern, it’s largely due to supply issues for now, and business sentiment remains soft, he said.

Philippines Seen Settling In for Long Rate Pause: Decision Guide

Consumer prices are rising at their fastest pace in two years, testing an aggressive monetary easing intended to support an economy that shrank by a record 9.5% in 2020. Policy makers cut the key rate by 200 basis points last year and boosted money supply.

The BSP has “limited options but to wait for the returns from expansionary monetary policy to materialize in 2021,” Moody’s Analytics Inc. economists led by Shahana Mukherjee and Denise Cheok wrote in a Feb. 5 note.

Here’s what to watch for in Thursday’s decision:

Inflation Path

Diokno has said policy makers are watching to see if transitory supply shocks will fuel higher price expectations, while some analysts are starting to warn of a risk of stagflation.

Policy makers likely will argue that price pressures will pass, but they may “revise up materially” their inflation forecasts and highlight potential second-round effects from rising prices, said Euben Paracuelles, chief Asean economist at Nomura Holdings Inc. in Singapore.

Philippines Seen Settling In for Long Rate Pause: Decision Guide

“That should give a much less dovish tone” to the decision despite the shaky economic recovery, said Paracuelles, who changed his rate outlook to hold from cut for the next months after January’s inflation number.

Fiscal Debate

With limited space to cut the key rate, the central bank could call for further fiscal measures to revive the economy.

Congress is considering a 420-billion peso ($8.7 billion) pandemic relief bill, even though the government so far has avoided outsized stimulus packages to preserve its credit rating. The government could consider more spending if the current budget and relief law are deemed insufficient, presidential spokesman Harry Roque said Monday.

What Bloomberg Economics Says...

“Weakened monetary policy transmission -- with lending rates elevated and loan growth weak despite ample liquidity -- is a major constraint to further rate cuts at this point, in our view.”

-- Justin Jimenez, Asia economist

For full note, click here.

“Public infrastructure investment should be a key driver” of the economy this year, said StanChart’s Narayanan, adding that he will also be watching for comments on business sentiment and the growth outlook.

Non-Rate Tools

The central bank says it’s willing to employ its full range of tools to boost growth, and analysts are keen for clues to their possible use. Diokno has said the central bank can extend another 280 billion pesos in budget support, on top of a 540-billion peso no-interest loan approved in December.

The governor also said there’s space to cut banks’ reserve requirement ratio. Risks of slowing money supply growth in coming months “would give scope for 100 basis points of cuts” in the ratio in the first half of this year, said Sophia Ng, an analyst at MUFG Bank Ltd. in Singapore.

©2021 Bloomberg L.P.

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