Philippines to Hold Rates, Growth View in Focus: Decision Guide

(Bloomberg) -- The Philippine central bank is expected to keep its benchmark interest rate at a record low Thursday as the economy continues to struggle with an elevated Covid caseload.

All 19 analysts surveyed by Bloomberg expect the Bangko Sentral ng Pilipinas to keep the key rate unchanged at 2%. The central bank has pledged to keep policy accommodative for “as long as necessary,” and while there’s a case to do more, some analysts think the bank’s available space is limited.

The frailty of the Philippine recovery suggests loose monetary settings will remain in coming months. The economy fell back into contraction in the second quarter from the previous three months, as extended lockdowns and the spread of Covid’s more contagious delta variant turn the nation into one of Asia’s laggards.

The economy is “expected to decelerate” amid lockdowns and a slow vaccine rollout, but even so, the weaker currency and an outlook downgrade from Fitch Ratings “have kept policy support at bay, either fiscal or monetary,” said Trinh Nguyen, senior economist at Natixis SA in Hong Kong.

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

Delta’s Impact

Analysts are keen to know how the BSP thinks the delta variant and vaccination pace will affect the recovery, which will in turn influence the length and extent of easy policy. Policy makers have said they’ll consider how ongoing lockdowns of the Greater Manila area, as well as data earlier this week that showed a quarter-on-quarter contraction in April-June, will impact the government’s full-year 6%-7% growth forecast.

“We expect GDP to return to pre-pandemic levels only in late 2022, a laggard among Southeast Asia peers,” Chua Han Teng, economist at DBS Group Holdings Ltd. in Singapore, said in a research note. The central bank is likely to keep the key rate at 2% all year and maintain its easy policy, he said.

Sustained Support

Analysts also will seek clues to whether policy makers are willing to reach deeper into their toolkit.

With “limited scope for further rate cuts as of now,” the central bank’s tone on bond purchases and other tools is of “particular interest,” said Robert Dan Roces, chief economist at Security Bank Corp. in Manila.

What Bloomberg Economics Says

“Moderating price pressures -- with inflation falling back at the top of its target range in July -- give the central bank space to keep policy settings loose to support the economy. A weak recovery gives it the motivation.”

-- Justin Jimenez, Asia economist

To read the full note, click here.

The central bank’s government-bond holdings have risen almost 400% during the pandemic. The monetary authority has flagged that a reduction to banks’ reserve requirement ratio remains “on the table,” depending on economic and credit conditions in coming months, though Governor Benjamin Diokno ruled out any RRR cut at this week’s meeting.

Peso Weakness

Besides growth, the bank’s outlook for inflation and the exchange rate will be of interest, “as that would dictate the monetary policy response until the first half of 2022,” Roces said.

The Philippine peso has lost 3.2% against the dollar so far this quarter, making it the second-biggest loser among major Asian currencies. The central bank is expected to update its inflation forecasts Thursday.

©2021 Bloomberg L.P.