Philippines to Hold Rates as Inflation in Focus: Decision Guide

The Philippines’ central bank is set to leave its key rate unchanged as it waits for previous easing to filter through an economy in recession, while watching for any spillover effects from faster inflation.

All 23 economists surveyed by Bloomberg predict the Bangko Sentral ng Pilipinas will keep its benchmark rate at 2% on Thursday for a third straight meeting. Many analysts see the bank worrying more about economic recovery than price pressures, even as food and oil costs pushed inflation last month to its fastest pace since December 2018.

Policy makers are “more hamstrung now” as above-target inflation “has ended BSP’s easing cycle prematurely, even though economic recovery is still weak,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore.

Philippines to Hold Rates as Inflation in Focus: Decision Guide

With the swift rise in consumer prices, the Philippines is now the only country in Southeast Asia with a negative real interest rate. Still, with the economy tipped to shrink again this quarter, policy makers have kept monetary policy loose.

The central bank has said it sees limited spillover from food and oil cost pressures, and that it tends to “look past the initial impact of supply-driven forces.” It sees average inflation remaining within its 2%-4% goal this year and next.

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

Runaway Prices

Despite few signs of runaway inflation, central bank watchers will keenly scan any comments on consumer-price views.

While policy makers will likely keep monetary policy easy for a while, they’ll “spring quickly into action” if supply pressures begin to drive up inflation expectations, said Nicholas Mapa, an economist at ING Groep NV in Manila.

Philippines to Hold Rates as Inflation in Focus: Decision Guide

The bank will give its updated inflation forecasts Thursday.

“If inflation pressures don’t abate in the second half, we are likely to see a rising risk of rate hikes,” Nomura’s Paracuelles said.

Recovery Path

The bank’s view on economic recovery will be closely watched after mobility restrictions were tightened this week in Manila and surrounding regions, the nation’s economic engine. The country has seen a record surge in cases in recent days, turning it into Southeast Asia’s virus hotspot.

“The Philippines continues to struggle with the pandemic,” said Noelan Arbis, an economist at HSBC Holdings Plc in Hong Kong. “Recent developments greatly impede the economy’s path to recovery.”

What Bloomberg Economics Says...

“Unless second-round inflation takes hold, we expect BSP will maintain a dovish stance and keep policy on hold for an extended period. Under our base case, we don’t foresee the central bank beginning to raise its key rate until at least 2H 2022.”

-- Justin Jimenez, Asia economist

Click here to read the full report

Observers are also looking to see if the central bank will call for a stronger fiscal response from the government. Finance Secretary Carlos Dominguez, who sits on the central bank’s monetary board, pledged last week to maintain fiscal prudence.

Support Measures

Aside from rate cuts, the central bank has sought to boost the economy through targeted measures such as support for the budget, buying of government bonds in the secondary market and loosening banks’ reserve ratio rules.

In January, central bank Governor Benjamin Diokno said the monetary authority is ready to further support fiscal spending. The bank approved a 540 billion-peso ($11.1 billion) loan to the government in December.

©2021 Bloomberg L.P.

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