Bangko Sentral ng Pilipinas (BSP) is seen to keep its key interest rates unchanged in today’s monetary policy stance, as the recent pressure on consumer prices is expected to ease in the coming months.
Chidu Narayanan, Asia economist at the British bank Standard Chartered, said in a research note that BSP is likely to hold back interest rates throughout 2021 and 2022, rooted in a “moderation in inflation combined with still soft growth and subdued sentiment. ”
Narayanan said inflation this year was likely to fall in the second quarter, after rising sharply in the first quarter. This was while the introduction of renewed nationwide lockdowns in March had gnawed at activity and hurt demand, the economist noted.
“We expect inflation to decline in the second half as the low base from 2020 fades. This should give the BSP room to maintain easy monetary policy, at least for the rest of 2021, ”Narayanan said.
Meanwhile, he noted that credit growth had fallen to low deposit due to lukewarm private sector activity. This is likely to remain subdued this year on subdued sentiment, he added.
The country’s inflation in May was 4.5 per cent, corresponding to the level in March and April, and was in line with market expectations. This indicated a continued exceedance of the BSP target range of 2-4 percent. ING Philippine economist Nicholas Mapa said that in the world of central banks, the US Federal Reserve and other major central banks were generally the pacesetters given the great influence they have on global financial markets.
The Fed is likely to eventually need to adjust or reduce the amount of monetary stimulus and eventually reverse to a tightening cycle, but only if the U.S. economy will show the proportionate gain that each step of normalization would require, Mapa said.
“At the moment, we expect the Fed to gradually ease the accelerator pedal by the end of the year, but we would like to point out that this tightening is only a minor stimulus, but not a complete reversal in attitude or driving style, stepping on the brakes,” said Mapa.
The US rate hikes, which are expected to start as early as 2022, will only be implemented if and when the US returns close to full employment, he said.
“With regard to the Philippines, it is quite clear that (BSP) Governor (Ben) Diokno is trying to do what is best for the economy, while monitoring the situation abroad, as this development is likely to have a direct impact on it. Philippine financial system, “Mapa said, noting that BSP had telegraphed a long break, meaning its daily borrowing rate would be anchored at 2 percent until at least June 2022.
“The notion that we need to calibrate a preventative step to prepare for a rate hike a year and a half down the line may not work in the best interests of the economy and will mean that BSP hits the brakes as soon as we get the car to empty forward. This can leave us susceptible to being the only car left on the track and falter further as everyone else zooms past us on the road to economic recovery, ”said Mapa. INQ
Subscribe to INQUIRER PLUS to access The Philippine Daily Inquirer and other 70+ titles, share up to 5 gadgets, listen to the news, download as early as 6pm. 4 and share articles on social media. Call 896 6000.