BSP EXPECTED TO KEEP RATES ON RECORD LOWS
THE Bangko Sentral ng Pilipinas (BSP) is expected to retain monetary policy settings on record lows to support the economy, after the Philippine Statistics Authority (PSA) announced another economic contraction in the first quarter of the year.
Local and international economists said Central Bank Governor Benjamin Diokno will likely follow through his initial guidance of keeping the BSP main interest rates on record lows up until signs of recovery in the Central Bank’s meeting this week.
The BSP has announced that it has moved its scheduled monetary policy meeting from Thursday, May 13 to Wednesday, May 12 to give way to the celebration of Eid-al Fitr.
The PSA announced that the local economy contracted by 4.2 percent in the first three months of the year.
“The economy remains stuck in low gear with first quarter GDP [gross domestic product] stalling by 4.2 percent as all sectors outside government posted declines. High unemployment and depressed consumer confidence weighed on overall activity with mainstay household consumption in the red again. With the outlook dimming with the full impact of the renewed community quarantine to be felt in the second quarter, focus shifts to BSP’S policy meeting,” ING Bank economist Nicholas Mapa said.
“With the economic recovery floundering, we expect the Central Bank to retain its accommodative stance with [the] BSP Governor indicating that stimulus would remain for as long as the economy needed it. Any expectations for a reversal in policy stance appear unjustified for now as the economy is clearly in need of more stimulus and not less,” Mapa added.
Rizal Commercial Banking Corporation (RCBC) economist Michael Ricafort also said that the BSP’S accommodative stance is a “pillar for economic recovery” and is likely to be maintained.
“Accommodative monetary policy measures that further keep borrowing costs relatively lower and spur greater demand for loans, investments, employment, and other business/economic activities, as monetary easing measures will do more of the heavy lifting for the economy amid limited government funds for any additional stimulus measures,” Ricafort said.
Meanwhile, Moody’s Analytics associate economist Eric Chiang said that with the dim outlook in local GDP, the BSP is likely to keep this stance unchanged for the entire year.
“The Central Bank, which will announce rates Wednesday, has kept the benchmark rate at a record low of 2 percent since November and is expected to keep monetary policy loose all year. Inflation has remained above the 2- to 4-percent target for four months now, although price pressures appear to be stabilizing as the authorities move to implement supply-side remedies to help lower the cost of food items,” Chiang said.
“The growth outlook for the Philippines remains relatively downbeat with the authorities recently tightening partial lockdown measures again in April as Covid-19 infections spiked. Recent lockdowns are expected to shave off momentum from the economic recovery and weigh on the services sector the most, with personal services not allowed to operate due to social distancing regulations,” the associate economist added.
The BSP has been maintaining its record-low overnight reverse repurchase rate at 2 percent for three consecutive meetings since December 2020. This is despite the acceleration in the country’s inflation, which the BSP projects to overshoot the ceiling of government targets for this year.
In 2020, the BSP rate cuts totaled 200 basis points for the year to bring the rates to an all-time low. The BSP also so far infused over P2 trillion in liquidity into the financial system, equivalent to 11 percent of the country’s GDP. It has also cut the reserve requirement for universal and commercial banks.
Despite this, bank lending contraction still accelerated in March.
The May monetary policy meeting will be the third monetary policy meeting of the BSP for the year. Should they decide to keep rates unchanged, this will be the fourth consecutive meeting that they have retained record low rates for the country.