GDP slump convinces BSP to maintain historic-low interest rates

by Ramon Royandoyan (Philstar.com) – 12 Aug 2021

MANILA, Philippines – The Bangko Sentral ng Pilipinas maintained its historic-low policy rate, keeping monetary support to the economy amid the coronavirus onslaught.

At its meeting, the powerful Monetary Board left the overnight reverse repurchase facility at 2%. Interest rates on the overnight deposit and lending facilities were likewise maintained at 1.5% and 2.5%, respectively.

It was a widely expected move after state statisticians reported two days ago that the economy collapsed again due to prolonged lockdowns. While the economy exited recession in the second quarter after growing 11.8% year-on-year mainly due to base effects, harsh lockdowns last April sent gross domestic product shrinking 1.3% quarter-on-quarter.

Governor Benjamin Diokno said inflation — while still elevated — is not much of a problem for the central bank for now. For this year, the central bank forecast consumer prices to average 4.1%, slightly above the state’s 2-4% annual target, before easing to 3.1% in 2022 and 2023. This, Diokno said, allowed the BSP to keep relaxed monetary policy settings “for as long as necessary” to help the flat-lining economy, which is under threat again after Metro Manila and some provinces went to harsh lockdowns this month to arrest the spread of highly contagious Delta variant.

“In particular, delays in the lifting of containment measures could further dampen prospects for global growth and domestic demand,” Diokno said.

“On balance, the Monetary Board is of the view that the expected path of inflation and downside risks to domestic economic growth warrant keeping monetary policy settings unchanged,” he added.

Rate cuts seek to entice consumers and businesses to borrow money since banks typically use the BSP’s benchmark rate as basis when charging interest for loans. But without a convincing fiscal response from the government to help Filipinos weather the coronavirus storm, the BSP’s easing moves have proven to be futile as banks stay risk-averse amid the rise of soured loans.

For Alex Holmes, Asia economist at Capital Economics, more rate cuts may be in store, especially once inflation eases.

“One of the main reasons the Bank hasn’t acted until now is elevated inflation,” Holmes said. “With inflation falling and the economic outlook becoming increasingly dire, we think that further easing is imminent. We have pencilled in a cut at the Bank’s next meeting in September.”

But there are analysts like Miguel Chanco, senior Asia economista at Pantheon Macroeconomics, who believe a surprise rate cut won’t be happening soon since inflation could possibly quicken this year.

“Such hardening of the inflation picture over the next 18 months further rules out the chances of a surprise rate cut,” Chanco said in a commentary.

“We maintain that a reacceleration in inflation in the remainder of this year is on the cards, as the country continues to import high and rising global food inflation, and as the lagged impact of the recovery in global oil prices filters through to utility and transport costs,” he added.