BSP is likely to keep key rates at record highs up to ’22

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Bangko Sentral ng Pilipinas. (Filfoto / Philippine Daily Enquirer)

Bangko Sentral ng Pilipinas (BSP) is expected to keep its key interest rates at record low levels through 2022, especially as the more contagious Delta variant of coronavirus weaves as a key risk to economic recovery.

This is according to the New York-based think tank Global Source, which sees the BSP continue to favor economic growth in the monetary policy equation, despite escalating tremors at a possible taper of stimulus from the US Federal Reserve (Fed). This means keeping interest rates constant at current levels.

“This reading is also shaped by our perception of weak recovery in domestic demand, which is even now threatened by the rapid spread of the delta variant in neighboring countries. Also, the pace of local vaccination so far as well as the uncertainty regarding the effectiveness of the vaccines used against the mutating virus leaves us wondering whether upward price pressure can be maintained due to the sluggishness of goods and labor markets, “said Global Source in a July 14 report authored by Philippine economist Romeo Bernardo.

Recently, the Philippines reported its first death from the dreaded Delta variant, shortly after discovering the first local transmission. This variant is worrying as it more easily infects human cells.

Independence of the Fed

Meanwhile, BSP Governor Benjamin Diokno himself had hinted that an expected Fed rate hike in 2023 would be “less of a threat to the Philippine economy compared to other developing and emerging economies”, citing the economy’s “sound foundation”. He had also assured that the BSP would only withdraw monetary support when signs of solid economic recovery had become clearer along with a manageable inflation environment and a sustained downward trend in COVID-19 transmission.

Diocno’s courage to assert the BSP’s independence from the Fed has been following local disinflation in recent months, Bernardo noted.

The liberalization of pork imports has resulted in a softening of meat prices and helped offset the sudden rise in global crude oil prices, the economist pointed out.

Despite openness to capital flows, Bernardo said that any reversal in these flows at this point, which would lead to a weaker peso, would be a boon to economic growth, especially for sectors that generate currency as exporters, outsourcing business processes ( BPO) and families of Filipinos abroad.

But while Global Source expects the BSP to maintain key interest rates through 2022, it cited several factors that could cause the local monetary institution to raise the key interest rate, one of which would be in the event of an economic downturn than expected.

“This could happen if the country avoids a resurgence of infections with its latest plan to focus vaccination in Metro Manila and other important urban areas that serve as entry points for new varieties. In the event that the boost in consumer confidence combined with potentially aggressive election spending could result in a US-style rise in inflation as the released demand is released, ”the economist said.

At the same time, Bernardo sees rising inflation remaining a threat on the horizon, citing continued talk of a diversity of global risks on the supply side related to post-pandemic global recovery that could affect consumer prices over time.

Although monetary policy is not designed to respond to supply-side shocks, rising inflation and the need to anchor inflation expectations may force a preventative BSP rate hike, he said.

Unrest in the financial markets is seen as another wild card.

Risky global financial conditions, possibly triggered by the dreaded early US monetary tightening (whether it is by declining its government purchases or raising interest rates) and / or mood swings regarding the large build-up of debt in new markets along with less favorable statements from credit rating agencies and local political risks can cause unmanageable capital outflows and cause monetary authorities to choose to tame an excess peso instead of maintaining political independence, ”Bernardo said.

Even without a rate hike, local market interest rates are seen as their signal from global markets.

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